Europe | Global | Monetary Policy & Inflation | US
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US Key Points
- CPI print to support continued 50bp hikes in the Fed Funds Rate.
- Consumer confidence could rise in line with this week’s strong PMI and NFPs.
Europe Key Points
- ECB policy decision and updated forecasts is the main event this week. Expect APP end to be announced, and a hawkish surprise in terms of tone and forward guidance.
- It is a light week otherwise in terms of data releases.
US
Fed
This week,Vice Chair Brainard rectified perceptions of dovishness in the minutes by saying that ‘Right now, it’s very hard to see the case for a pause in September’. The Beige book showed a somewhat softer economy, with 4 districts noting that the pace of growth had slowed and three that price increases had moderated somewhat.
The pre-meeting blackout period started this weekend.
Data
The manufacturing PMI and NFP surprised on the upside. Covid cases, test positivity and hospitalizations seem to be flattening.
The key data release this week is the CPI. The consensus forecast is 0.5% MoM, which seems reasonable to me. ECI-based wages are probably running at 5-6% which implies core services inflation in a similar range, while core goods inflation is likely to remain elevated. Continued MoM prints in a 0.4-0.5 range could see the Fed maintain 50bp hikes until end-year.
Other key data include:
- U Mich consumer confidence: the consensus forecast is for a slight increase 58.9 against 58.5 in May. This would be consistent with the strong NFP and PMI.
- Consumer credit: I expect a further acceleration relative to $52bn in March in view of the falling household savings rate. By contrast the consensus expects a decline to $33bn.
- Trade balance: I disagree with the consensus that expects an improvement in the deficit to $90bn against $110bn in March as demand for consumer durables and for capex goods remains strong.
- Jobless claims, real estate market data and budget balance.
Events/Political Developments
Primary elections are continuing with a mixed performance by candidates backed by former president Trump.
Senate democrats are making one last attempt to get Senator Manchin on board on a budget bill that addresses climate change and lowers prescription drug prices, which I don’t expect to succeed.
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
Europe
The ECB
After last week’s CPI overshoots across much of the Eurozone, the ECB will need to show that it is committed to fighting inflation in order to silence the naysayers. However, on account of their well set out sequencing path (APP ends, then hikes can start), their hands are largely tied in terms of immediate action.
Instead, President Christine Lagarde will likely want to stress the path she has previously set out (exiting negative rates by end-Q3), and then some. The majority of the ECB’s policymakers now seem to back 25bp hikes in July and September, which the market is already pricing. A more hawkish tone could come in various forms, including:
- Leaving a 50bp hike (either in July or September) on the table.
- More explicitly mapping out the path of policy after the exit from negative depo (e.g. suggesting that ‘normal’ policy is close to ‘neutral’ policy).
Both would be relatively easy to do, she was no-doubt careful not to preclude the former in her blog post, while the latter relates to action taken further down the line, rather than anything immediate. Whether the ECB will have the time to get anywhere near neutral (somewhere between 1 and 2%) seems unlikely, but that probably won’t stop more being priced in until the story changes.
Meanwhile, in the forecasts the existing ECB baseline forecasts from March will be changed substantially. Inflation has significantly overshot (Chart 1). While ECB speakers have stated realized data looks more like the ‘Adverse’ scenario they laid out then, it is now looking more like the ‘Severe’ one.
Growth forecasts will also need revising – only lower. Consumer confidence numbers continue to decline, while business sentiment, too, is coming down (albeit slower). The higher inflation will need to be factored into household appetite to spend, and business expectations for investment. Meanwhile, slower global growth (US and China in particular) will need to be accounted for in export expectations. Together this should mean a more bearish growth story, with further downside surprises from the war possible.
Ending APP imminently is a very high likelihood. Credit spreads are not currently breaking out. On a beta-adjusted basis they are actually tight. However, in outright yield terms the cost of debt is rising fast. Corporate as well as periphery EGB debt has grown substantially more expensive to issue (Chart 2). As time passes the sustainability of more expensive debt will become an issue, particularly given how leverage has grown since the pandemic. The imminent end of TLTRO attractive terms will add to this rise in funding cost by making it more expensive for banks to finance themselves, and by requiring a greater quantum of bank bonds to be issued.
To fight off the risk of a spreads blowout, the ECB can continue to refer to their up-coming ‘crisis tool’, although details on this are scant. That will likely remain the case at this week’s meeting; there being little incentive for them to risk providing new information that risks disappointing.
Other G20 Countries
This week the RBA is holding its policy meeting where it is expected to hike 40bp and the BoC Macklem is speaking.
Key data releases this week include China’s services PMI, foreign reserves, trade balance, PPI, CPI and credit.
Links to BOJ Rinban , BOE OMO