Watch Out for the Fed Reaction to the CPI

US

Key points

• Watch out for Waller and Clarida’s Friday’s speeches as they will likely provide the first indications of how the Oct. CPI has impacted Fed thinking on policy normalization
• Look out for signs that a resurgence in serious Covid infections is underway

Fed

Oct. whopper of a CPI was released on Nov. 10th and Nov 11th was a holiday so the only post-CPI comment so far has been Williams on Nov. 12^th.    Williams was providing a keynote address at a NY Fed conference on the impact of inequality on the transmission of monetary and fiscal policy.  Speech and conference papers are yet to be published but the financial medias reported that Williams, a dove, stated that maximum employment is “the employment you can get with 2% longer-run inflation”. That seems rather hawkish to me.

To gauge the initial FOMC reaction to the CPI the most important speech will be Clarida’s and Waller’s on Friday. Even though Clarida’s speech will be on Global Monetary Policy Coordination there will be a Q&A where US inflation and monetary policy are bound to pop up. Waller’s speech will be on the economic outlook. Waller, a hawk, is likely to reflect Clarida’s and Powell’s views. Daly will also be speaking on the economic outlook on Tuesday but being a SF-based dove is less plugged in the Board hawkish majority.

Other speakers will discuss racism (Barkin, Bostic, George), Treasury Markets (Williams, Daly, no Q&A), accounting and auditing (Bowman), financial stability (Mester, Waller, no Q&A), stablecoins (Waller, Q&A), mid-sized banks coalition of America (Evans, no Q&A), community development and regional outlook (Bostic, no Q&A), financial services industry (Evans, Q&A), Fed listens (Daly). 

The FOMC does not like to surprise markets at policy meetings. Therefore if, as I expect, a faster taper is announced at the Dec meeting, some hints will be provided beforehand. Because of the constraints placed on the Fed communications—under the Government in the Sunshine Act all gatherings of 3 FOMC members or more have to be minuted—a policy consensus is likely to be reached through bilateral communications between Powell and other FOMC members.  This could take a week of or so, which would bring us into the Thanksgiving week, not a good period for important communications. At the same time the next FOMC meeting is on Dec 15^th i.e., the pre-meeting blackout period will start on Dec. 4^th. This leaves the post Thanksgiving week starting on Nov 29^th as the period when the Fed is most likely to signal a policy change.

Data

The CPI was not only higher than expected, it showed a broadening of price pressures to just about every category of spending (see October CPI Leaves Faster Taper and Stronger Recession Risks).  At the same time consumer confidence plunged with consumers viewing conditions for purchasing durables as worse than during the GFC {CONSDURR Index}.  This suggests that, despite the better than expected consumption and employment number, LT economic risks are still tilted to the downside. 

The COVID data this week confirmed that the decrease in cases and hospitalizations is over (chart 1, 3 and 4). This is consistent with Sam’s assessment that US immunity is one of the lowest in the world: the US started immunizations earlier than most countries but fully vaccinated one of the lowest vaccination shares in the world.

It is too early to predict how a resurgence of serious infections would impact the economy—much would depend on the policy response—but Google’s mobility data shows a pronounced decline around workplaces and public transit (chart 2). 

The most important data of the week will retail sales. The Bloomberg consensus at 1.1% mom makes for an increase in real terms of about 0.5% mom based on PCE (PCE is likely to come in lower than CPI due to compositional effects). This seems too high in view of falling consumer confidence, ongoing substitution of services to goods, and the fact that the only services included in retail sales are restaurants.

Other key data include NY, Philly and KC Feds surveys, IP, inventories, TIC, housing market and unemployment claims.

Events/Political developments

President Biden will sign the bipartisan infrastructure bill on Nov 15^th. Meanwhile the BBB bill remains stuck in the limbo between house and Senate.    There are 2 more pressing issues for investors.

Government funding expires on Dec 3^rd. Another continuing resolution (stop gap funding at last year’s level) is likely to be passed by Dec 3^rd to avoid a government shutdown.

Debt ceiling. Secretary Yellen has warned that the debt ceiling must be raised by Dec 3^rd to avoid default while think tanks see mid-December as a more realistic deadline.  In October the debt ceiling was raised with bipartisan support but this time around Senate Minority Leader McConnell has publicly committed to not supporting another increase.  As a result, the debt ceiling will have to be increased through reconciliation which Senate Majority Leader Schumer has so far refused to do.

Following Democratic setbacks in state and local elections earlier this month I expect Schumer to concede and raise the ceiling through reconciliation. This would take about 2 weeks from start to finish and therefore Schumer is likely to initiate the process the week after Thanksgiving.

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

G20

The RBA publishes its minutes this week.  Central bank speakers include the BoE’s Pill and Haskel, the RBA’s Lowe, Richards, and Ellis, and the BoC Schembri.

Key data this week include CPIs in the UK, 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.

(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.)