The Fed Could Catch Up to the Curve

US Key Points

• FOMC chair Powell adopted a more hawkish tone, which the doves on the FOMC seem to be open to
• Headline NFP could surprise on the downside; participation and wages are key

Europe Key Points

Jump to Europe section

• An opportunity for a lot of comments from ECB and BoE speakers this week
• In data, European March CPI outturns are expected to show a further spike in price pressures
• Spanish and Italian Manufacturing PMIs are released

US

Fed

Chair Powell turned more hawkish on Monday and since then, even FOMC doves such as Daly, Evans, and Williams have signaled openness to 50bp hikes. I now expect a 50 bp hike at the May FOMC meeting (see Hawkish Powell Suggests 50bp at May FOMC Meeting).

That said, it is not clear that the Fed is now fully on board to catch up to the curve.  It matters because in past Fed hiking cycles, the output and employment costs of reactive and prolonged hiking have been highest (see Immaculate disinflation risks a protracted recession).

The full senate vote on the confirmation of Powell, Brainard, Jefferson and Cook is expected to take place early next week. The first three are expected to garner bi-partisan support but Cook could struggle. If so, her confirmation could be down to centrist Democratic Senator Manchin who has yet to communicate his views. Manchin did not support Raskin, which effectively ended her confirmation, because of her perceived hostility to fossil fuel industry. 

As of this writing, speakers next week are Williams, Harker, Bostic and Barkin.

Data

Durable goods orders were below expectations, especially shipments that tend to be correlated with equipment capex. Covid test positivity and hospitalizations are starting to level off at close to or below the low of 2021. School closures continued to decline and were the lowest since September. Mobility seems stable while air passenger traffic is growing.

This is a data heavy week. The most important data will be Friday’s March payrolls. I am expecting a negative surprise to the consensus of 480k for headline as it implies a roughly unchanged 3mma when the economy is slowing. In addition, consumer surveys and PMIs suggest the labor market is starting to soften. Because of the softer labor market, I also expect a negative surprise to the consensus 0.4% mom on hourly wages. I agree with the consensus view on an increase in participation. 

The second most important data will be Thursday February PCE. I agree with the consensus 0.4% for core. However, because of supply disruptions, core is not as reliable an indicator of inflation as before the pandemic. I view median price or trimmed mean inflation as better indicators of trend. Those get published by the Dallas Fed, that is located one time zone behind New York, and definitely not on the same tight schedule as market participants! Still we can expect the trimmed mean PCE in late morning EST and that will be the number to watch. Trimmed mean CPI and PCE tend to track and the March trimmed mean CPI suggest a small decline in trimmed mean PCE.

The third most important data will be February personal income and spending. I agree with the consensus 0.5% increase in both nominal income and spending. Those will be below expected Feb. mom PCE at 0.6%. I will be looking for further declines in real goods consumption, especially durable.  Consensus forecast implies a roughly constant savings rate, which is my expectation too.

Other key data includes:

• March Conference Board consumer confidence: the consensus expects a further weakening and I agree given the economic slowdown and the signs of labor market softening. I will be looking for a further decline in the Jobs plentiful minus Jobs hard to find indicator.
• February JOLTS: I will be looking for a further decline in the ratio of vacancies to unemployed and of actual hires to vacancies as well as in the quits rate.
• March ISM Manufacturing PMI where I will be focusing on indicators of demand, supply bottlenecks and employment.  
• Dallas and Chicago Feds PMIs, goods trade balance, inventories, and real estate and construction data.

Events/Political Developments

Centrist Democratic Senator Manchin this week signaled he is ready to restart talks on a scaled down version of Build Back Better focused on clean energy incentives, lower drug costs, higher taxes, and deficit reduction.

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

Europe

Central Bank Speakers

The flow of central bank speakers continues this week, with probably more room for comments on specific policy than was seen last week. This means there is room for comments from ECB President Lagarde (on the consequences of Russia’s invasion) and Panetta (on digital currency) on Wednesday, Chief Economist Lane (on consequences of the pandemic) and VP de Guindos (on topical issues) on Thursday, before we get to hear from hawks Schnabel and Knott on Friday. For the BoE it is quieter, although Governor Bailey speaks (on the economy) on Monday and Broadbent speaks Wednesday.

Data

In data, major European releases this week include March preliminary manufacturing PMIs for Spain and Italy (Thursday), and March CPI outturns (from Wednesday).

PMIs came out decently stronger in France and Germany than we and the market had expected, despite the effects of higher costs, supply disruptions and sentiment from the war in Ukraine, in particular in German manufacturing. We expect services will continue to benefit from the fading of Omicron, across Italy and Spain, although the risk to manufacturing remains, given the two countries’ high exposure to gas prices. There, the market is looking for a decline on February’s readings, but for both numbers to remain decently above 50.

In Eurozone CPI, the expectation is for further rises in headline across the board, with particularly strong moves in Italy. A core EZ CPI move above 3% (as market consensus implies) would be a significant shift and would be expected to garner strong comments from ECB speakers (particularly Schnabel and Knott).

Our expectation is that with the divestment from Russian energy, the persistence of inflation will be prolonged beyond simply the near-term oil and gas spikes. That is something Schnabel is fully aware of, and will likely talk to. The ECB as a whole, however, will likely continue to drag their feet in the near-term, looking through this effect. Any shift in position on this from Lagarde or Lane would be very interesting.

Politics

Monday sees the UK Chancellor’s testimony to the Parliament following his Spring Statement last week. The pressure there will likely be on the hit to real incomes expected, despite measures taken last week.

Other G20 Countries

Key data releases include PMIs in Australia, China, Canada, and Japan.

  

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.)

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