WOOD Flash – US macro: no surprises, but no respite; recession is coming

At the November FOMC meeting, Chairman Powell signalled a slowdown in the pace of the rate hikes, but the message overall remains consistent with up to a further 250bps of tightening in the coming months. The hard data show that the labour market is cooling slowly, but to achieve low single-digit inflation by the end of 2024E, the Fed needs to trigger a contraction of US annual GDP and hope that food inflation will slow for a sustained period of time. The significant disparity in cash available in the upper half of the income distribution relative to the bottom half and the unfolding digital transformation are permitting what appears to be a very resilient economy in the face of higher interest rates. We stress that this is a phenomenon of slower transmission lags, not a barrier to rising unemployment and contracting spending next year. We stand by our call for renewed USD strength in the near term, US 10-year treasuries yields trading sideways in the near term and falling in 2023E, and no fundamental push to the upside for the S&P 500.