Welcome to our State Space series. Here you will find how we’re thinking about the pathways and scenarios that could take us to critical economic states. We will never settle for "it's too unlikely." We try to reason backwards from the most important (tail-risk) scenarios, their most likely pathway to fruition, and the indicators that allow us to monitor the likelihood of each pathway. Updates will share how these pathways are (or are not) playing out, and if new risk scenarios are potentially emerging.

The major shifts from the baseline outlook in the previous edition of our State Space series:

  1. Fed policy seems set to at least "skip" June, and be done with the hiking cycle by July. Terminal rate will either be 5.125% or 5.375%. We lean slightly to the former but it's a close call.
  2. Recession probabilities have fallen as permanent layoff data abated and growth data picked up in cyclical sectors.
  3. Inflationary challenges stemming from automobiles and rented housing are very slightly less concerning than what we perceived a month ago. Our Core-Cast now signals that Core PCE should be 0.30% month-over-month and Core Services Ex Housing PCE should be 0.28% month-over-month. Following this upcoming week's April release, Core Services Ex Housing PCE should show some slowing over last 3-4 months, with possibly consecutive 0.2% monthly increases (not our baseline view, but an asymmetric risk due to higher deposit rates).

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