Key Events: Fed to Follow Market

US Key Points

• The Fed SEP FFR forecast is likely to follow market pricing as the Fed models cannot explain the ongoing surge in inflation.
• Retail sales to surprise on the upside.

Europe Key Points

• BoE policy decision – a fifth consecutive 25bp hike is expected. There is potential for a more hawkish outlook following the recent fiscal package, and the growing public dissatisfaction with high inflation.
• Plenty of ECB speakers on the airwaves, to provide steerage following last week’s hawkish meeting.
• UK April labour market data likely to continue to add pressure for BoE tightening, even while real retail sales is likely to have slipped back in May.
• Final May CPI results across the Eurozone will provide more colour on the breadth of the inflation surprise.

US

Fed

I expect Chair Powell this week to refrain from providing specifics on the policy trajectory beyond the July meeting. This is because there have been only 6 additional weeks of data since the May meeting. In addition, the doves still have to be convinced that 50 bp hikes could be needed beyond the June-July meetings.  The doves could be arguing that some measures of inflation are already close to 3% and that there is nothing sacrosanct about the 2% target.

At the same time, the FOMC will have to show their hand through the new SEP. I expect the end-2022 inflation to get “marked to market” with a small increase while the end-2023-24 prints are likely to remain unchanged. Lifting the inflation trajectory by more would undermine further the Fed credibility.

I expect the SEP FFR forecast to basically reflect what the market is pricing for 2022 ie about 3% at end 2022, and 3.25% at end 2023 and 2024.  The reasons are:

• The markets are not pricing much.
• FOMC participants must be confused:
  • Inflation expectations are stable, yet inflation is soaring.     
  • As FOMC members have been stressing the tightening of financial conditions started at end 2021 yet inflation is still soaring.

In this context the markets provide the main signpost left to the FOMC. Please see my full FOMC preview to be published on Monday.

Data

The CPI beat already high consensus expectations of a 0.5% mom core CPI print.  This makes for 6% annualized core inflation, too high even by the Fed FAIT standards. In any event the actual number turned out 0.6% i.e. above 7% annualized.  Chair Powell must be wishing FAIT had never been invented! Please see my detailed inflation forecast End-2022 Inflation To Exceed fed Forecast.

Covid cases, test positivity and hospitalizations are flattening. 

The most important data this week are retail sales. They will tell us how households are reacting to higher inflation. The more comprehensive personal income and spending data released around month-end shows that so far households have kept real consumption on trend through saving less. I expect this to continue which makes the consensus prediction of 0.1% increase in May retail sales very low. I expect a positive surprise.

Other key releases this week include:

• PPI and import price indices where I agree with the consensus.  I will be paying extra attention to the price of semi-conductors where I expect no slowdown.
• Empire, Philly Fed and NFIB surveys:  the consensus expects an improvement which would be consistent with the US economy getting a second wind from households lower savings, so I agree.
• Industrial production and capacity utilization: the consensus expects a further increase in capacity utilization, which makes sense to me.
• Real estate market data: I expect the data to paint the picture of a market that is normalizing, but not crashing.
• Inventories: even excluding cars, the inventories to sales ratio is not rising and I expect this week’s data to show the same.  The recent increases in inventories reported by big retailers reflect logistics and management issues rather than an unexpected demand slowdown.
• TIC, and Conference Board leading index.

Events/Political Developments

Secretary Yellen indicated this week that the administration is looking to reconfigure some of the tariffs on imports from China to lower the costs to American consumers.

Links to New York Fed POMOs/TOMOs:  Repos, Treasury, MBS, CMBS

Europe

UK Data Remains Hawkish – the BoE to Hike 25bp

The BoE is expected to hike by 25bp once again, taking its Bank Rate to 1.25%. The last meeting in May saw hawkish dissent, with three votes for 50bps (Catherine Mann, Michael Saunders and Jonathan Haskel). While the doves (Jon Cunliffe and Silvana Tenreyro) voted for 25bps at that time, there were comments suggesting they did not see any additional need for hiking then. Given the high recent inflation print (in line with BoE projections), the growing public disgruntlement with price rises, and the recent fiscal package, it is possible that this dovishness has faded somewhat, and there is some risk of a more hawkish outturn.

In UK data, April GDP (Mon) is expected to show a bounce of 0.2% MoM after March’s slight decline, led by industrial production and services growth. Labour market data (Tue) meanwhile continues to point to a highly tight labour market, with wages growing significantly faster than pre-pandemic rates. This week’s April release will likely show that this continues to be the case, with expectations for regular pay growth staying high at 4.0%, while total pay growth rises further to 7.2%. These are all factors that drive the BoE’s need to tighten further. However, alongside this need comes continued pain for households. May retail sales (Fri) should show this continuing to build, with expectations for a decline of 0.6% MoM following April’s bounce, leaving real sales growth down 4-5% YoY.

ECB Speakers

Following the hawkish-lean to the ECB’s meeting last week (penciling in 25bp for July, leaving the door open to 50bp or more in September, and guiding a path of ‘consistent’, ‘gradual’ hikes thereafter), there is a flurry of ECB speakers to listen to. Given market reaction thus far, expect the hawks to sound relatively supportive of the action taken (as per Holzmann), while the doves may be somewhat more conscious of the widening out in BTP/Bund spreads, and hence talk up the commitment to prevent ‘fragmentation’ (as per Villeroy). The majority of ECB speakers will be speaking at an online economics event aimed at young people in Milan, which will see a number of ex-ECB executives also speak, including ex-Buba arch-hawk Jens Weidmann.

Eurozone CPI and ZEWs

The final readings of May’s German, French, Italian and Eurozone CPI are released next week (from Tue to Fri). While little is expected in terms of a change from the surprisingly high preliminary outturns earlier this month, the new details will be highly informative. Spain’s final reading was released last Friday, and came out in line with the preliminary one. It showed that energy and fuels continue to drive the MoM rise, while service price growth remained comparatively contained.

Other G20 Countries

This week the BoJ is holding its policy meeting where it is expected to keep policy unchanged.

Key data releases this week include China’s retail sales, Capex, and industrial production.   

Links to BOJ Rinban , BOE OMO

COVID-19 Monitoring

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank. He holds a BA in Economics from Durham University, and an MSc in Economics & Social History from the University of Oxford.

(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.)