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Soft or Hard Landing?

Although the odds of the Fed containing inflation without a recession have improved, risks continue, creating a volatile environment for financial markets. On the eve of another FOMC meeting on Tuesday and Wednesday, September 19th and 20th, optimism has grown that the central bank may have achieved the elusive goal of a soft landing.

The Fed raised interest rates eleven times since the first-rate hike in March 2022. Federal Funds target rate has soared from 0% to 0.25% to 5.25% to 5.50%, or a 22-year high. The central bank is expected to hold rates steady at the upcoming September meeting. The latest CPI data shows that another rate hike is possible before the end of 2023.

Since World War II, the U.S. has achieved only one soft landing in 1995. A soft landing in the U.S. is rare and difficult to achieve. A perfect economic environment is required for the Fed to have a shot at creating a soft landing. For instance, many believed in soft landings during 1990, 2001, and 2007. They were disappointed as recessions occurred.

The four (4) threats to the Fed achieving a soft landing:

(1) The Fed stays too tight for too long.

(2) The economy stays too hot.

(3) Energy and commodity prices continue to rise.

(4) Credit, financial, or geopolitical crisis.

There must be an equitable balance between supply and demand to create a soft landing. The current economy is currently operating efficiently. Anything that strokes a rise in demand can ignite inflation. Anything that leads to a drop in demand can send the unemployment rate higher, triggering a recession.

The U.S. economy has been resilient so far in 2023. Job growth remains healthy. Consumers continue to spend, and corporate profits are rising. GDP has risen and inflation continues to retreat from its peak. The stock market shows no signs of investors expecting corporate earnings to decline, and the unemployment rate to rise sharply.

Will the Fed discover next year that they have raised rates too much?

Or has the Fed not raised rates enough?

There is little room for errors for the Fed to engineer a soft landing. Airplanes can land. But economies, especially mature ones, require an ideal economic backdrop for a perfect landing.

We turn to the financial markets to gauge the state of the U.S. economy and the potential for a soft or hard landing.

In equities, investors remain defensive, as evidenced by a trading range in U.S. stocks. SPX remains confined to the middle of the 3-plus month trading range between 4,325-4,335 (Jun 2023 breakout and late-Jun/Aug 2023 lows) and 4,607-4,637 (Mar 2022 and Jul 2023 highs).

The bulls are encouraged by the 3-plus month technical base and view this as another consolidation before resuming the October 2023 primary uptrend. The bears see a head and shoulders top pattern and warn of the resumption of the January 2022 downtrend.

The ability of the S&P 500 Index (SPX – 4,453.53) to break out above resistance at 4,541.25 (9/1/23 negative outside day high and right shoulders) and preferably above 4,607.07-4,637.30 (7/27/23 high or the head) negates the distribution top and reinforces the primary uptrend. A breakdown below 4,325-4,335 (neckline support) and 4,302.15 (38.2% retracement from Mar to Jul 2023 rally) solidifies the h/s top and warns of a deeper correction toward 4,100-4,200.

Within commodities, geopolitical tensions in Ukraine/Russia and China have created a volatile commodities environment. Recent oil production cuts from Saudi Arabia and OPEC members have boosted global oil prices.

The CRB Index (CRB – 289.38) peaked in early June 2022 (329.59) as the benchmark commodities index consolidated its gains over the past 1-plus year. The ability to find support at 253.85-254.03 (Mar/May 2023 lows) has led to another strong recovery. A recent breakout above 279-283 (Jan and Apr 2023 highs and the 38.2% retracement from Jun 2022-May 2023 decline) hints at a CRB rally toward 291-292 (50% retracement, near-term) and then 300.5-301.75 (61.8% retracement and Aug 2022 high, medium-term). Below 278-280 (Aug 2023 breakout and 50-day ma) and 270.5-273.5 (Aug 2023 lows and 200-day ma) suggest commodity prices and inflationary pressures subsiding.

WTI Crude Oil (WTIC – 90.58) suffered a setback after peaking in March 2022 (130.50). The ability of WTIC to find support at 63.57-64.36 (Mar and May 2023 lows), rebounding from the Aug/Dec 2021 lows (61.74/62.43) and signaled a bottom. The recent surge above key resistance at 83.5-85 (Apr and Aug 2023 highs) hints at a retest of intermediate-term resistance at 93.5-97 (late-Aug and Oct/Nov 2022 highs, Mar 2022 downtrend, and the 50% retracement) and 102-105.5 (late-Jul 2022 highs, the 61.8% retracement, and Aug 2023 breakout projection).

In fixed income, the yield curve has inverted as the short end of the yield curve is consistently above the long end. Yield curve inversion increases the chance of an impending recession. However, the Fed controls shorter-term maturities via the Fed Funds target rate. The longer-dated maturities reflect the future outlook of the U.S. economy. The benchmark U.S. 10-year Treasury yield (TNX) tends to be a better proxy of the health of the U.S. economy and a reliable indicator of inflation and recession.

TNX nears pivotal resistance at 4.333-4.362%, coinciding with the Oct 2022 and Aug 2023 highs. A breakout reaffirms the structural breakout above 3.0-3.25% (2022) and suggests 4.54-4.66% (top of the Mar 2023 uptrend channel and the short-term breakout target) and above 5.32-5.46% (Mar 2002 and Jun 2007 highs and intermediate-term breakout projection). Initial support rises to 3.96-4.10% (May 2023 uptrend, Aug 2023 breakout, and Aug 203 lows) and below 3.74-3.75% (Jul 2023 lows and the 200-day ma).

The performances of SPX, CRB, WTIC, and TNX remain a better gauge of the health of the U.S. economy and a better indicator of a soft or hard landing for next year.

Source: Chart courtesy of

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