The debate is whether or not the financial system will undergo a recessionary “hard landing,” slamming into the bottom and inflicting substantial harm, or a “soft landing,” through which the financial system gently comes again to earth and taxis to the terminal. Those well-worn phrases have been used for many years to explain Fed-induced financial downturns.

See: Fed tightening ‘always breaks something’: S&P 500 will drop to three,800 by March, warn Bank of America strategists

Now, extra economists and strategists are speaking of a possible “no landing” situation, through which the financial system skirts recession altogether. Think of a pilot aborting a touchdown on the final second, pushing up the throttle and climbing again into the sky. It sounds good, however there’s a catch.

Here are the arguments for every situation:

Hard touchdown

A run of hotter-than-expected U.S. financial information during the last couple of weeks has blunted fears of a 2023 recession, however they haven’t been banished. A reminder got here Friday within the type of the Conference Board’s Leading Economic Index, which fell once more in January.

“Reasonable minds can disagree about whether the economy is headed for recession or a soft landing, especially after a recent run of strong data. The Leading Index is not waffling however,” mentioned Tim Quinlan and Shannon Seery, economists at Wells Fargo, in a Friday notice, with its tenth straight decline “still consistent with recession.”

The LEI is a gauge of 10 indicators designed to point out whether or not the financial system is getting higher or worse. The index fell 0.3% in January after a 0.8% fall in December. Economist David Rosenberg, founding father of Rosenberg Research & Associates, calls the LEI “a 100% ironclad recession forecaster.”

Measures of producing exercise point out contraction, whereas the yield on the 10-year Treasury notice
TMUBMUSD10Y,
3.821%
trades far beneath the yield on the 2-year notice
TMUBMUSD02Y,
4.629%.
Such inversions of that portion of the curve have reliably preceded recessions, with a lag, for many years. That mentioned, some economists, together with the researcher who found the connection between the curve and recessions, have doubts about its signaling energy within the present setting.

Soft touchdown

A continued run of resilient information in different areas, notably the all-important jobs market, lifted hopes that the financial system can stand up to the Fed’s aggressive marketing campaign of price hikes that started almost a yr in the past and seems unlikely to have run its course till this spring or summer season. The January jobs report was broadly described as a blowout, with the financial system including 517,000 jobs and the unemployment price falling to three.4%, its lowest since 1969.

That additionally leaves traders and economists centered on weekly jobless claims and different labor information for any signal of a shift.

“It is tough to have a recession with the unemployment rate at its lowest in a half-century. If the economy is to avoid recession, employment will be the key,” wrote Quinlan and Seery.

January retail gross sales additionally proved a lot stronger than anticipated, rising 3%, underlining the power of the buyer and displaying the financial system continues to develop.

Skeptics doubt that the financial system can keep away from recession given how aggressively the Fed has tried to sluggish the financial system, taking the fed-funds price from close to zero to a spread of 4.5% to 4.75% in lower than a yr. The full impact of these rate of interest will increase are doubtless but to work their method via the financial system, and extra are on the way in which.

“Hopes for a soft landing have grown, but the cumulative effects of the Fed’s rate hikes are likely to eventually stall growth,” wrote strategists at Glenmede.

No touchdown

In a no touchdown situation, the financial system averts recession altogether. A still-hot labor market and a wholesome shopper are seen offering the gas that enables the financial system to develop and probably speed up. And whereas exercise within the manufacturing sector could also be contracting, the providers sector, which accounts for round 80% of the financial system, remains to be going sturdy.

Growing curiosity within the no touchdown situation has divided merchants “over what matters more to the stock market — rising rates or a resilient economy,” mentioned Matthew Weller, international head of analysis at Forex.com and City Index, in a notice.

Optimism over a resilient financial system might clarify the continued outperformance of expertise and different progress shares within the face of a continued rise in Treasury yields, “as traders weighed still-high prices against recent economic and earnings data that give scant sign of a serious slowdown,” he wrote.

Read: Why Wall Street’s growth-heavy Nasdaq Composite remains to be rallying as Treasury yields rise

The potential catch is that financial resilience will make for sticky inflation. Investors have largely come spherical to the Fed’s view that rates of interest might want to rise larger than markets had anticipated just some weeks in the past. But now, the Fed might transfer its personal expectations even larger after the January consumer-price index and the producer-price index provided indicators inflation is now retreating at a slower tempo.

Indeed, shares stumbled the previous week, with the S&P 500
SPX,
-0.28%
struggling a second straight weekly decline and the Dow Jones Industrial Average
DJIA,
+0.39%
falling, whereas the Nasdaq Composite
COMP,
-0.58%
held on to a acquire. A pair of regional Fed presidents on Thursday mentioned they might have backed a half-point price rise on the central financial institution’s Jan. 31-Feb. 1 assembly, which noticed coverage makers ship a quarter-point hike.

See: After scorching U.S. financial information, the large query is whether or not the Fed will return to 50-basis-point price hikes