Charts of the Week: Extremely Loose US Fiscal Policy, Sticky UK Inflation

Summary

• US fiscal policy is still highly accommodative and likely to prompt a 25bp hike from the Fed in June.
• US equities are back in demand after a lull through 2022, with foreign private investors buying again.
• UK inflation is stickier than the BoE assumed. Core and services components rose even as headline fell.
• Gasoline inventories are extremely low, threatening a summer price spike.

US Fiscal Policy Remains Extremely Accommodative

The recently announced deal between President Biden and House Speaker McCarthy removes uncertainty on the US debt ceiling with only a limited decrease in expenditures. The FY2024 deficit remains 5.7% of GDP, about the same as the CBO FY2023 projection. Fiscal policy therefore remains highly accommodative (Chart 1). And it leaves most of the burden of stabilizing the economy to the Fed. Following the deal, Dominique expects a 25bp hike at the June 2023 FOMC meeting.

Foreign Investors Are Buying US Equities Again

Foreign private investors started to move into US equities in 2019 and then really piled in through 2020/21 (Chart 2). In fact, the 12-month flows to February 2021 were even larger than the dot-com period. Since then, foreign investors sold US equities heavily, but have started to buy US equities again this year.

A Big Beat for UK Inflation

While the labour market is largely developing as we had expected, UK inflation continues to confound both our own and market expectations. April inflation data added further to this mood with beats versus consensus across headline (+8.7% YoY vs 8.2%) and core (+6.8% vs +6.2%), as well as services inflation rising above BoE expectations (+6.9% vs 6.7%; Charts 3 and 4). This suggests inflation is stickier than the BoE had assumed.

Low Gasoline Inventories Threaten Summer Spike

Currently, gasoline inventories stand at 218mn barrels. That is 6% lower than the five-year average of 233mn and the lowest during this time of year since 2014. Gasoline inventories tend to peak in February. Downtrends then tend to emerge, lasting until well after driving season is over (end of August) and into October.

Should the trend in inventories look similar this year, gasoline inventories could bottom at 200mn barrels, which would be the lowest since 2012. Dangerously low gasoline inventories would require gasoline cracks to remain higher for longer to incentivise refiners to shift production from other refined fuels (Chart 5).

There would likely be a knock-on impact on inflation too, as even if oil prices remain steady, gasoline prices would continue to creep higher, which would feed into CPI.

Matthew Tibble is Commissioning Editor at Macro Hive. He has worked as an editorial consultant and freelance editor for companies such as RiskThinking.AI, JDI Research, and FutureScape248.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)