Will the Fed get inflation under control?
Outlook: The calendar is lean this week with most of the interesting data coming from the housing market, although now that mortgage rates are above 5% we have some extrapolations to make.
Due to the holidays, which seem to be getting stronger year after year – we haven’t had a Good Friday holiday in banking in decades past – we may have missed some really good US data this week. last. The Empire State Manufacturing Survey jumped to 24.6 in April from -11.8 when a mere 1% was expected. Industrial production in March rose 0.9%, double the forecast, and capacity utilization is at 78.3%, the highest since 2007. This bodes well for the PMI expected on Friday.
And bizarrely, the University of Michigan’s April preliminary consumer confidence survey showed an upside when a decline was expected. Trading Economics has this: “University of Michigan consumer sentiment for the United States unexpectedly jumped to 65.7 in April 2022 from an eleven-year low of 59.4 in March, according to estimates. preliminaries. The numbers also beat the market forecast of 59, with the expectations index jumping 18% to 64.1.
“Perhaps the most surprising change is that consumers were expecting gasoline prices to rise by just 0.4 cents in April, completely reversing March’s rise to 49.6 cents. The current conditions gauge has also been increased from 67.2 to 68.1. At the same time, inflation expectations remained unchanged both for the year ahead (5.4%) and for the five-year outlook (3%). Nonetheless, the April survey offers only tentative evidence of weak gains in confidence, which are still too close to recessionary lows to be reassuring. There are still significant sources of economic uncertainty that could easily reverse April’s gains, including the impact on the national economy from Putin’s war, and the potential impact of new covid variants has increased as that the outlook for inflation was stable.
We don’t usually pay much attention to the Michigan survey, in part because the number of participants is quite low (we couldn’t find the latest figure, which tells you something here). In years past it was something like 1500, pitifully small for an influential survey. The survey makers themselves are a bit biased, as shown by the translated remark that April’s gains can easily be reversed. The site itself has an addendum on the breakdown of political party responses.
We admit that it is possible that the US consumer is able to ignore risk and uncertainty, but it is a little more difficult to grasp that inflation expectations are stable at 3% for the 5-year outlook. Everyone knows the price of gasoline and food. Is it possible they believe the government/Fed will get inflation under control? This is also consistent with the 5-year breakeven at 3.33% and the 10-year at 2.89% (according to FRED on April 14).
And note that no one is trumpeting on the front page that the negative yield curve reading 2/10 (-0.05% on April 1) has reversed and as of Thursday it had risen to +0.36% . We will hear less about an “inevitable and impending” recession this week. Okay, that might not last, but it’s a warning that it’s ridiculous to extrapolate a few weeks of data over 12 to 36 months.
A ray of light on Europe and potentially on the euro: yesterday, Italian Prime Minister Draghi gave a newspaper interview – his first since February 2021 – arguing that Europe can reduce its energy dependence on Russia screws faster than expected, according to Bloomberg. “Diversification is possible and achievable relatively quickly, shorter than we imagined just a month ago.” This is after Italy got the gas from Algeria.
He said, “We have gas in storage and we will have new gas from other suppliers,” and it would help a lot if people just turned the thermostat down. “Europe continues to fund Russia by buying oil and gas, among other things, at a price unrelated to historical values and production costs.” Talking to Putin is a waste of time – it doesn’t work, as we can see.
This precedes a showdown over gas payments. Bloomberg points out “…there is a growing risk that Putin’s demand for gas payments in rubles could lead to a de facto gas embargo in Europe as lawyers for the bloc draft a finding showing that payments in Russian currency violate the sanctions”.
While we expect US data to be fairly resilient, as Friday’s PMI will show, and Wednesday’s Fed minutes confirming the commitment to a 50 basis point hike at the May meeting , US yields should continue to rise. Yield differentials don’t always determine a currency’s fate and we’ve had times where the correlation just isn’t there, but it seems to be in effect these days. Japan remains committed to curve control and the ECB falters indecisively, leaving Anglo-Saxons to pave the way not only for higher rates but also for an end to QE and a one-rate approach. real that makes sense. Note that we are getting the minutes from the Reserve Bank of Australia this week and a fair amount of data from Canada. As “commodity currencies”, among other characteristics, these currencies “should” perform better.
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