Last month, when the Federal Reserve hiked 75 basis points instead of the 50 it had announced, Chairman Powell cited the University of Michigan’s surprisingly strong CPI and high consumer inflation expectations. . June CPI to be reported July 13 and the University of Michigan’s preliminary consumer inflation forecast for July will be released two days later.

This may have been a tactical error, although only one Fed official seemed to think so. Kansas City Fed President George, a hawk, preferred 50bps as the Fed had signaled. As inflation accelerated, the base rate fell. Additionally, the Fed is targeting the PCE deflator, which is less sensitive to housing and energy prices. The problem with quoting a preliminary report is that the final report may be different, and indeed it was. Instead of climbing to a new high of 3.3% from 3.0% as predicted by the preliminary estimate of consumer inflation expectations 5-10 years ahead, the final reading came in at 3.1% , corresponding to the January peak.

It may never be known if a Fed official helped trigger the news story the next day suggesting a 75 basis point hike was likely. Some banking economists almost immediately moved in this direction. The June fed funds futures implied yield had a 52 basis point tightening the day before the CPI data. It strengthened to 57 bp at the end of June 10, when the CPI and University of Michigan surveys were published. After a good weekend of reflection and the press articles, the market moved to a price of 72 basis points of tightening.

The “quick” effort to get the fed funds rate to neutral and beyond means the central bank will use any opportunity it gets or creates. St. Louis Fed President Bullard was candid about it. The Fed must ratify what the market is doing based on central bank guidance. While some pundits will cringe at any similarity between Powell and Volcker, one can recall that Volcker cited money supply growth to justify what he thought the Fed should do anyway.

Fed funds futures suggest the market is giving the Fed another option to hike 75 basis points at its next meeting on July 27, the day before the release of the first Q2 GDP estimate. The market entered the weekend with around 95% confidence in a 75 basis point rise. Although there are clear signs of a slowing economy, that is what the Fed is trying to accomplish. So, rather than preventing it, the slowdown confirms that the Fed is on the right track.

Yet the fact that Powell cited the CPI gives the report added significance. The monthly increase will be 1% or more for the third time in four months. The median forecast of a 1.1% month-over-month gain would take the year-over-year rate to 8.6% to 8.8%. This would boost confidence that the Fed will take another three-quarter step. It could also increase the perceived odds of a 75 basis point hike in September. Market has about 1 in 5 chance instead of 75 instead of 50bp currently discounted.

Nevertheless, a change is afoot. Despite rumors of widening price increases, the CPI base rate is expected to slow for the third month in a row. The base rate matters, not because it excludes volatile food and energy prices as some experts claim, but because, as Powell noted, it is a better predictor of inflation. future. That is, over time, the security converges with the base rate, not the other way around. Market-based inflation expectations, as measured by the 10-year breakeven, fell to new lows for the year at the end of June, near 2.3%, and recently consolidated below 2, 4%. The two-year breakeven, which had approached 4.5% the day before the FOMC close, fell to nearly 3.05% in early July and ended just above 3.20% the following day. last week.

A one or two tick rise in the 5 to 10 year inflation forecast in the University of Michigan survey does not seem as large as the general trend, and it is stable although high by 2, 9% to 3.1% for almost a year. Instead, what seems more remarkable is that the consumer sentiment reading, which was revised to 50 in the final June reading, is associated with past recessions. Feeling is not just a mental state, but that mental state is shaped by what one experiences directly or indirectly.

The United States also reports retail sales, industrial production and business inventories. Outside of the headline impact, data points are key as economists refine Q2 GDP estimates. This is particularly important because there is a discrepancy between two historically reasonably good estimates. The first is the Atlanta Fed’s GDP tracker, which sees the economy contracting 1.2%. The other is the median forecast from the Bloomberg survey. This seems slightly closer to the actual first official estimate than the Atlanta Fed tracker. The Bloomberg survey median is 3.0%, but this may overestimate the case. What Bloomberg calls a weighted average is 1.8% and the average is 2.8%. The eight forecasts that have been updated this month have an average forecast of 1.55%. Notably, only one of the 60 forecasts predicts an economic contraction in the second quarter.

On July 15, China will release June monthly data (retail sales, investment, surveyed unemployment rate) and Q2 GDP. Bloomberg is apparently conducting two investigations. The monthly survey contained 24 forecasts, and the median forecast called for a 1.5% quarter-over-quarter contraction after a 1.3% expansion in the first quarter. The other survey, the results of which are published on the economic calendar page, has 10 responses with a median forecast of -2.3%. Maybe the exact print doesn’t matter.

The takeaway is that the zero Covid policy means that the official target of around 5.5% growth this year will not be met. The multilaterals (IMF, World Bank and OECD) estimate Chinese growth at 4.3%-4.4% this year. The market is less optimistic. That said, stimulus efforts and easing of lockdowns point to the possibility of a robust recovery in H2. Of course, with a relatively less effective vaccine and less fully vaccinated people (especially those 60 and over), there is a risk of further economic disruption.

China could cut interest rates or reduce reserve requirements, but its revealed preferences show that a cut in the medium-term lending facility (set on July 15) is unlikely. It cut the rate by 10 basis points in January, which was the first cut since the pandemic moved in early 2020 when it cut the rate by 30 basis points. No change to the medium-term lending facility means the prime lending rates, set on July 20, will also be kept stable.

The UK reports May GDP on July 13. Monthly GDP contracted unexpectedly in March and April (-0.1% and -0.3%, respectively) and stagnated in February. The economy has not grown since January, after contracting 0.2% in December. Although we noted that economists do not expect the US economy to contract in the second quarter, they are less optimistic about the UK. The median forecast (Bloomberg) is for a contraction of 0.1%. A quarter of the 36 projections have not been updated since mid-May. The average of the last five updates (June 30-July 8) estimates that the UK economy contracted by 0.4% in the second quarter.

Just as the Fed raised rates as GDP fell in the first quarter, the market is confident that the Bank of England will also weather the possible contraction. A quarter-point rise at the Aug. 4 meeting is a foregone conclusion, and the swap market is leaning heavily toward a 50 basis point (~83%) move. British politics can make for good theater but hasn’t really been a market factor. In the forex market, the British pound saw its recent slide against the dollar extend and two-year lows were recorded (~$1.1875). However, as cabinet resignations multiplied in the first half of last week, the pound rose against the euro and hit its best level in almost three weeks. It regained its footing in the second half of the week against the dollar. The $1.2100 area may offer the first hurdle.

Australia releases June employment figures early July 14. The Australian labor market is robust: record unemployment rate and record participation rate. It created an average of almost 61,500 full-time jobs per month until May this year. During the same period last year, the average was 45.5,000 and in 2019 it was below 19,000. another half-point move at the next August 2 meeting.

While the RBA and the BOE only meet next month, the Bank of Canada meets next week. The swap market sees a fully discounted 75 basis point rise on July 13. This would bring the target rate to 2.25%. The market favors a 50bps move higher the next meeting, but has about a 1 in 4 chance of another 75bps move instead. The end-of-year rate is estimated at around 3.50%. The treatment of the Canadian dollar as a risky asset (high and reasonably stable correlation in recent months with the S&P 500, ~0.70) remains dominant. However, we note that the other two factors in our informal model, namely commodities (oil as a proxy) and credit spreads (two-year spreads as a proxy), also increased the correlations. The correlation between exchange rate changes and the two-year gap is the highest in five months (~0.38). Exchange rate and WTI price movements increased in May and stabilized in June and July (~0.43).

The Reserve Bank of New Zealand is expected to raise its cash rate target by 50 basis points on July 13. It will then be 2.50%. With three more meetings after this year, the swap market still has 140 basis points of tightening factored into the curve. Based on current prices, this could turn out to be the peak, even if the CPI is hovering around 7%. This year, the 9.4% drop in the New Zealand dollar makes it the worst performer in the dollar bloc. The Australian dollar fell almost 5.7% and the Canadian dollar lost just under 2.5%.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.