Europe | Global | Monetary Policy & Inflation | US
Fed Minutes Likely to Hint at May Start to QT
- By Dominique Dwor-Frecaut and Henry Occleston
- 7 min read
US Key Points
- The Fed minutes are likely to provide details on QT and hint at May start.
- The services PMI is likely to signal easing demand for labor.
Europe Key Points
- BoE and ECB speakers on the wires, and March ECB minutes released.
- A quieter week for data. Spanish and Italian March Services PMIs are released as well as other countries’ final readings.
- French, German and Spanish February industrial production and Italian retail sales are released.
US
Fed
FOMC members continued their public discussion of monetary policy strategy and implementation this week, without conveying a sense of common framework. Evans, a dove, still supported 25bp hikes at each 2022 meeting this week while George, a hawk, called for a significant decline in the Fed balance sheet. Barkin and Harker were ‘open’ to 50bp in May, Bostic wanted a flexible approach, Bullard wanted the FFR above 3% by end-year.
This does not change my expectation for 50bp in May, as on economic grounds, alone, the case is strong and Chair Powell has turned more hawkish (see Hawkish Powell Suggests 50bp at May FOMC Meeting).
The full senate vote on the confirmation of Powell, Brainard, Jefferson and Cook has yet to take place but this week, a procedural vote, needed to clear Cook’s confirmation out of a committee gridlock, showed she had support from all democratic Senators. She is therefore likely to get confirmed alongside Powell, Brainard and Jefferson. Professor Cook, a BLM activist, is likely to become the most dovish FOMC member and as Board Governor, will be a permanent voting member.
This week the Fed will release its minutes that are likely to provide details on QT, as well as hint at the start at the May FOMC meeting, as mentioned by Chair Powell in his last public appearances. We might also get more color on the internal FOMC debate on inflation risks and the speed of tightening.
As of this writing, speakers next week are Williams, Brainard, Harker, Bullard, Bostic and Evans.
Data
Overall, this week’s data releases supported my narrative of a slowing economy due to sliding household consumption. As I expected the headline NFP data disappointed and other indicators such as lower hours worked, unchanged unvoluntary part time work, and stagnant real wages also signaled a labor market that is starting to soften (please see March 2022 NFP: Somewhat Slower). As consensus and I expected, real household income and consumption fell MoM and most importantly the savings rate increased. Savings rate stabilization implies that going forward consumption will be driven entirely by income i.e. wages and employment. PCE was as expected and trimmed meaning PCE fall though is likely to be revised up.
COVID-related hospitalizations continued to decline this week. School closures fell further. While the test hit rate has stabilized – below the 2021 low. It looks like the new variants are mild.
This is a data light week. The highlights will be the services PMI where I will be paying particular attention to the employment component.
Other key data include factory orders, trade balance, jobless claims and wholesale inventories. I will be paying special attention to the mortgage applications index, a key leading indicator of the housing market. Please see my analysis of the US residential real estate market.
Events/Political Developments
The administration announced that it would release up to 1mn barrels of petroleum a day over 6 months, about a third of the Strategic Petroleum Reserve. This is unlikely to have much of an impact on prices, please see Bilal’s analysis.
President Biden’s job approval ratings continue to fall, with inflation cited as a key reason by respondents. Early projections for the November mid-terms show the Senate as a toss up and the House as likely to turn red, though redistricting seems to favor the Democrats.
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
Europe
Central Bank Speakers
The early week sees BoE Governor Andrew Bailey and Deputy Governor Sir Jon Cunliffe. Last week saw Deputy Governor Ben Broadbent stating the over-dependence that market pricing has upon CB speakers rather than the data. Bailey, in his comments last Monday stressed the uncertainty in the outlook right now. The comments saw a paring of BoE hike pricing in the market, but since then it has crept back up. We expect that the market will ultimately end up disappointed by the BoE’s hiking paths. However, until the April inflation peak is behind us it seems likely that the market will continue to price hawkishly.
In the ECB, meanwhile, ECB Chief Economist Philip Lane’s comments on Friday pointed again towards the downside risk to the outlook, noting that stimulus could be extended if the outlook worsens. 10Y BTP/Bund spread jumped above 150bp again on Friday, although corporate credit spreads remained well anchored. The ECB doves will be watching the spreads closely, while the hawks will likely continue to beat the drum around the potential for hikes in H2. By then, we expect Eurozone CPI will be on a strong downward trajectory (energy base-effects begin to fall away from this month), and the dovish case will be easier to make.
ECB minutes (released Thursday) will no doubt make for interesting reading. At that time, we correctly anticipated the hawkish acceleration of AP winddown. This, and the ending of generous TLTRO terms in the coming months provide them reason not to press ahead with hiking too quickly afterwards. It will be interesting to hear the debate around the updated forecasts, given that the medium-term horizon remaining sub-2% looks increasingly unrealistic.
Data
Data is light on the week, with some hard February industrial production and retail sales data across the EZ. With this data pre-dating the Russian invasion, it is less informative than more timely readings, although it should still capture a period in which gas prices began to rise. So far, the soft data suggests that consumers more than firms have felt most of the effect, and the expectation is for IP to have continued its bounce in February.
Other G20 Countries
This week the BoJ Noguchi is speaking and the RBA is holding its policy meeting where it is expected to stay on hold.
Key data releases include China’s PMIs, inflation, foreign reserves and credit and Canada’s PMI.
Links to BOJ Rinban , BOE OMO
COVID-19 Monitoring
