Tone Setting Week Ahead
I usually write a couple of paragraphs recapping the market’s action over the previous week. But, with such a pivotal week ahead for data and Central Bank meetings, it seems more sensible to peer into the future. The Fed’s monthly meeting starts tomorrow and concludes on Wednesday when its decisions will be announced early evening UK time. The outcome of the meeting and Jerome Powell’s press conference will set the tone and direction of the markets certainly for the next few weeks, if not longer. There has been a lot of market chatter, especially over the last month, about whether the US Federal Reserve will skip, pause or even pivot at their June meeting. Headline inflation in the US is undoubtedly moving downwards at quite a lick giving encouragement to those that expect a skip or pause, but core inflation is proving stickier than many have thought it would. And there lies the root of Jerome Powell and his merry men’s problem is the core stickiness a prelude to a reacceleration in headline inflation?
With an understandable fear of inflation reaccelerating, to your humble scribe, it seems surprising that so many expect a pause from the Fed. The economy is undoubtedly starting to suffer in the US. However, the stock market is still surprisingly strong, creating household wealth, which hit a record level in the first quarter. Unemployment at 3.7% is still comfortably below 4.5%, the level that would concern the Fed, and the housing market is showing signs of resilience. CPI is released in the US tomorrow and is expected to print around 5.6% annually, with a monthly print of 0.4%, at least double the Fed’s target range. Of course, there is the possibility of a sharper drop than anticipated, which may encourage the Fed to skip a hike, and of course, the converse is true that any beat on the upside will push up the odds for another rise. The danger they face in doing so is that traders will interpret any skip as a pause/pivot and start looking for cuts which is the last thing the central bank wants. As they say, it’s all to play for, and the after-meeting Press conference could be one of the most important that Jay Powell has given. Will the surprise moves upward in rates by the Reserve Bank of Australia and the Bank of Canada possibly be a forerunner for the Fed? Personally, and I am in the minority, I believe that the Fed will follow its Northern neighbours and hike again this week. And to be a little controversial, I think it will continue to move rates until Fed Funds reach 6%, where they will stay for much longer than anyone dares to think.
After the Federal Reserve, we have the European Central Bank convening on Thursday, after which they will announce their policy decision at 12.15 (BST). Whilst the 1st Quarter GDP showed the EU entering into a technical recession this week, unemployment looks OK, but, more importantly, inflation remains sticky. The mood music from ECB policymakers has been pretty consistent, and it would be a major surprise if they didn’t raise rates by 25bp this week, followed by a further hike next month or later in the summer. We won’t have to wait long to see if the move is right or wrong, as Eurozone CPI is scheduled for Friday. However, it must be said that any move by the ECB will be overshadowed by the Fed, and as such, the direction of the Euro is likely to be set in Washington, DC, not Frankfurt.
Last, and of course, never least, the UK has some key data to digest this week, although it will likely be overshadowed by the ECB and Fed meetings. The luminaries in Threadneedle Street will be hoping that wage inflation, released tomorrow, will show some signs of moderating, but from the noises on the picket lines, this will be a slower process than they desire. As so often is the case, it’s hard to see clearly what the UK government or Central Bank are trying to achieve. Are they trying to lower inflation by the power of wishful thinking? I read during the week that our policymakers look like the children in the hit TV show Succession, squabbling for attention whilst getting nowhere and in need of a takeover by a powerful outsider. Unfortunately, this is not going to happen as we look woefully bereft of talent on both sides of the house and at the Old Lady. Although I must say, in fairness, sterling hit a one-month peak against the dollar last week whilst testing a nine-month high against the Euro; whether it can maintain these lofty levels is open to debate.