15 May 2022 Europe | Global | Monetary Policy & Inflation | US

Retail Sales Could Surprise on the Upside

By Dominique Dwor-Frecaut and Henry Occleston
7 min read

US Key Points

Retail sales could surprise on the upside.
High visibility primary election to cast light on former President Trump influence on the GOP.

Europe Key Points

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A heavy week for policy maker comments, with various important ECB and BoE speakers, as well as the release of April’s ECB meeting minutes.
April CPI data for the UK will provide the first sign of the effect of the energy cap rise, while EZ final CPI numbers will provide extra details as to the rise seen in the core rate.

US

Fed

The gloves are off: Powell warned on Thursday that the ‘process of bringing inflation down to 2% will include some pain’. Williams talked about ‘softish’ rather than soft landing. Bullard pushed for an end-2022 FFR at 5.5%, Mester was open to 75bp after the next 2 meetings while Bostic, Kashkari, Daly, Williams and Barkin supported 50bp at the next 2 meetings and generally refrained from commenting on further steps.

The Senate confirmed Chair Powell for a second term, as well as profs Jefferson and Cook as Board members (Brainard was confirmed 2 weeks ago). Jefferson got more votes than Powell and Cook did not get a single GOP vote.

This week Williams and Evans (doves) and Bullard, Harker and Mester (hawks) are speaking, and we are likely to see the same pattern with hawks expressing support for faster hikes if needed and doves not commenting on rate hikes beyond the July meeting.

Data

Core MoM CPI was higher than expected at 0.6% MoM and the U Mich consumer confidence index was below expectations, reversing the unexpected April increase.

This is a data light week. The most important data will be retail sales. I see scope for a positive surprise relative to consensus of 1% MoM as nonmortgage households borrowings are growing fast and could offset the decline in real income. Households have been deleveraging since the GFC and have strong capacity to borrow while, due to high inflation, real interest rates are historically low.

The second most important data will be the residential real estate data. I will focus on the number of existing single-family homes available for sale, in months of sales, (EHSLMSUP Index released on Wednesday) because it is a good proxy for excess demand and is strongly correlated with price changes. In February, it hit a post-GFC low of 1.5 and in March rebounded to 1.9, relative to 4 before the pandemic and before the housing bubble of the 2000s. This data is important because real estate and consumer durables are the 2 demand components that are interest rate sensitive and so far there has been no visible impact from higher mortgage rates on real estate prices.

Other key data include:

Industrial production, NY, and Philly Feds business surveys. I agree with the consensus that expects a slowdown as the supply side of the economy is likely to be feeling the impact of China’s lockdown and the war in Ukraine on global supply chains.
Conference Board leading indicators, business inventories, and unemployment claims.

Events/Political Developments

The primaries season continues to get underway with mixed results for GOP candidates backed by former President Trump. They won in West Virginia and lost in Nebraska.

Tuesday his week will see the high visibility Pennsylvania primary to determine who will run to replace Senator Pat Toomey, the most senior Republican on the Senate banking committee who is retiring in November. The race will pit a TV celebrity, Dr Oz, endorsed by former President Trump, against the former CEO of Bridgewater, David McCormick, though both could lose to a third, African American female candidate.

The results of the primaries matter because they could determine if former President Trump has retained enough influence over the GOP to be its candidate in the 2024 presidential elections.

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

Europe

Politics

Likely to dominate the week will be continued tensions over the moves made by Finland and Sweden towards NATO accession, and the prospects for EU sanctioning of Russian energy. Joining the alliance is not a given just yet, with Turkish President Recep Tayyip Erdoğan remaining apparently unconvinced by the positivity of the move. Unanimity is required for new members to join. Talks between the Swedes, Finnish and Turkish will take place over the weekend. Russia’s full reaction remains to be seen, but an escalation in words and actions is likely. Russia reportedly stands ready to cut electricity access to Finland from this week. Ostensibly this has to do with payment issues, but in reality it is almost certainly a response to Finland’s announced bid for NATO membership last Thursday.

ECB and BoE Speakers

The week will see another slew of ECB speakers, alongside the release of the April meeting account on Thursday. Last week saw a change in tone from President Christine Lagarde and Executive Board Member Elderson, shifting towards a July rate hike. This likely now leaves the majority consensus of the ECB in favour of raising rates in July, although amongst the most important policy makers September still clinches it.

The week ahead will allow us to hear from important doves, Philip Lane, Fabio Panetta, and Luis de Guindos. A change in tack there may seal the deal for the first hike timing. In such an instance, we would expect that the speakers emphasis the caution that will come (gradualist approach) following the first hike, in the same way that Lagarde did.

With markets now pricing 5-6 hikes in the next 12 months it seems that the dovish tilt to Lagarde’s comments has been largely overlooked. Her comments this week may provide an opportunity for further clarification.

Meanwhile, BoE MPC members will also be out in force, with the MPC’s testimony to the House of Commons Treasury Select Committee on Monday. Here, it is likely that the decision to raise rates into a cost of living crisis will come under scrutiny. The MPC members will push back that inflation is what hurts the worst off the most. Regardless of this, it is clear that raising rates the way the market is pricing is looking increasingly unattractive. We will also get to hear separately from arch-dove John Cunliffe (Tue), and Chief Economist Huw Pill (Fri).

Data

In the data, CPI will be under scrutiny, with UK readings for April released on Wednesday, alongside European final April readings (throughout the week). The UK numbers will include the first signs of the effect of the energy price cap, and is expected to sore above 9% YoY. Core, too, will be expected to rise, up to above 6%, from 5.7% in March. The BoE is already looking for a very high number in the readings, so these outturns should not greatly affect expectations there.

In Europe, this week’s inflation data is predominantly final numbers for April, when the readings significantly overshot expectations. While there is only a modest expectation for a change in outturn in the final number, the details will be interesting. So far through this inflation spike the drivers have been almost exclusively energy related. However, with the stabilization in April headline CPI and rise in core CPI the details of the drivers will be particularly important to understand. By our calculation through April, May and June, YoY base-effects should turn negative across a number of commodity markets, which should in turn help to reduce headline numbers ahead.