China | Europe | Global | Monetary Policy & Inflation | US
Key Events: The Fed Transitory Pause
- By Dominique Dwor-Frecaut, Ben Ford and Henry Occleston
- 6 min read
US – Europe – $-Bloc and Scandies – China/Japan
US
Summary
- Markets to digest SVB bankruptcy that is unlikely to turn out systemic.
- Used car price inflation could turn positive and end disinflation.
Fed
I am expecting the Fed to stay on hold next week, though it is a close call. The Fed is likely to balance two concerns:
- Showing that there is no financial dominance i.e. that its capacity to implement its inflation mandate remains unconstrained by the current financial instability. Failure to do so would undermine its inflation fighting credibility.
- Worsening the confidence crisis. In the current context, a rate hike could be seen by market participants as a sign that the Fed does not have their back and trigger another bout of deposit flight from smaller banks.
The Fed is likely to pick the lesser of two evils, and given that market confidence is still fragile, is likely to choose financial over economic stability. At the same time, the Fed is likely to stress that a pause in hikes is transitory, for instance, through an increase in the SEP terminal FFR (see full preview).
Data
The Atlanta Fed GDP nowcast for Q1 rose to 3.2% from 2.6% a week ago. The Citi economic surprise index rose to 50.7 from 44.7 a week ago. Core CPI mom was 50bp, 10bp higher than consensus.
This is a data-lite week and the releases predate the SVB crisis so won’t tell us much about its economic impact. Releases include by order of importance:
- Home sales, existing (Tuesday), new (Thursday): existing sales are the more important indicator since they are 7 times larger than new home sales. I agree with the consensus that expects an increase in existing home sales. This would be the first one since January 2022, and one more sign of home prices stabilization, though residential investment is still contracting.
- Durable goods orders (Friday): I agree with the consensus 1.5% mom, following a 4.5% mom contraction in January. 40bp for core mom. I will be paying close attention to capital goods shipments that tend to correlate with equipment capex in the GDP data and showed a recovery in January.
- S&P manufacturing and services PMI (Friday), KC Fed survey: I agree with the consensus showing the surveys moving sideways or weakening marginally.
- Chicago Fed national activity index (Thursday): I agree with the consensus.
- Jobless claims (Thursday): I agree with the consensus.
Events/Political Developments
The Treasury has been defencing its handling of the banking crisis while coming under fire from Democrats and republicans for the asymmetry of treatment applied to large and small banks.
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
Europe: A Hawkish End to the Week in Europe, Doves and PMI in Focus
You can read our ECB review here.
The ECB hiked by 50bps and sounded reasonably hawkish at the policy meeting despite the banking sector stress, as we had expected. In doing so, the ECB announced no new facilities to support banking sector liquidity while they purposely left forward guidance from the picture and limited themselves to a data-dependent approach to future policy decisions.
It was the turn of the hawks just a day later. Muller (hawk), Villeroy (neutral/hawk), Simkus (neutral/hawk) and Kazimir (v. hawk) all gave their take on core inflation, with Muller noting there is no signs of persistent inflation pressures easing while Simkus sees risks remaining to the upside. Moreover, all bar Villeroy stated we are yet to reach the terminal rate yet, with Kazimir stating it is useless to speculate on the size of the May hike.
The final February inflation reading backed up the hawkish chatter with the breadth of inflation far from showing any signs of easing inflation persistence while core inflation momentum ticked higher (Chart 1 and 2).
The following week will be full of speakers – 13 speeches are scheduled. It will be important to hear from the less hawkish members of the ECB – Lane (neutral) and Panetta (dove) on Wednesday, and Stournaras (dove) on Thursday – and Lagarde who will outline how she is looking at monetary policy transmission, one of the three key watch points of the ECB.
Preliminary March PMIs (Friday) end the week. Service PMIs have returned above 50, a continued push higher, with any indication of services price pressures, would add to the feel that the Eurozone is undergoing a wage price spiral and that more hiking will be needed (Chart 3).
Inflation Likely Backs a BoE Pause, 25bp a Tail-Risk
We have long held the view that the BoE is overpriced and would pause in March, we just needed the data to confirm our suspicions – noting incoming labour data alongside February inflation as key.
Overall, UK January ONS and February HMRC labour market data showed an upside surprise to employment growth, which allowed unemployment to remain stable, slightly to the downside on February MPR expectations, while the pattern of wage growth was more dovish, with signs of sharply easing private regular pay growth. As a result, there was insufficient data from the labour market update to suggest that the BoE will be concerned their MPR forecasts were too dovish.
There is a high bar for inflation to surpass for us to say the BoE will hike. Services inflation will prove the most important part. A MoM rate below 1.3% MoM would place the YoY trajectory lower than what the BoE had forecasted. A tough challenge when February services is typically the second weakest monthly reading while momentum has only been pointing lower over the past half a year (Chart 4).
$-Bloc and Scandies
China/Japan
