"Textbook-style" soft landing coming? Powell may replicate the bull market of 1995

TS Lombard's Global Macro Director, Dario Perkins, stated that he never doubted the ability of Federal Reserve Chairman Powell. He sees the 50 basis point rate cut more as a victory against inflation rather than a warning of an imminent collapse of the U.S. economy.

"It is important to remember that the Fed's monetary policy over the past two years has been set in a macro environment that is vastly different from the current one - with inflation at multi-decade highs, severe labor market imbalances, and policymakers fearing a repeat of the 1970s. Given the complete reversal of all these trends, it is clear that Fed officials can justify a 50 basis point rate cut without unsettling the markets or causing excessive panic," he said.

He added that the U.S. no longer needs "emergency levels of monetary tightening," which should be favorable for risk assets.

Perkins stated that a scenario similar to 1995 is now playing out for the economy and markets.

The economy appears similar to 1995 (left is the ISM index; right is initial jobless claims)

"This is not only a textbook example of the 'soft landing' that the Fed is aiming for now, but also a 're-calibration' of monetary policy in the medium term (rather than a complete reversal), where the central bank will lower rates to a neutral level after a deliberate period of restrictive policy," he said.

Perkins does not rule out the possibility of an economic recession but suggests that considering the absence of severe financial imbalances and the ongoing fiscal policy support, any recession would be mild. "We believe investors are underestimating the resilience of the U.S. economy, which could be very mild even in the event of a recession by historical standards," he said.

In his view, the bond market is pricing in excessive monetary easing. "We expect a long-term bond bear market, with yields hitting higher lows and higher highs in the 2020s, even if monetary policy deviates from this trajectory in the short term," he said.

Regarding the stock market, he remains optimistic. Previously, he introduced his own economic recession indicator, creatively named the Perkins Rule, which indicates that the signal of an economic recession is a contraction in employment, not a gradual increase in the unemployment rate.

He said, "Investors should only sell stocks when job growth turns negative. Remember, you don't need to trade stocks by predicting a recession, you just need to recognize it once it has started," he said. "Given investors' confidence in Fed put options, the stock market will always give you an opportunity to exit risk assets before it's too late."