Outlook: The US economy remains resilient and fairly resilient. But a low PPI and/or CPI reading this week could reignite doubts about the Fed’s resolve, even if the vast majority believe the Nov. 3 monetary policy meeting will deliver 75 basis points, hell or high tide. It’s a small and temporary risk to the dollar. Today at 1:35 pm ET, Chicago Fed Evans and Vice Chairman Brainard discuss “Restoring Price Stability in an Uncertain Economic Environment”. There’s a webcast if you need a nap.
The problem with the Fed’s outlook is that we have no way of knowing how much they respect The Lag. It claims to be data-dependent, but surely all those savvy back-office economists take into account that the data is horribly backward-looking, by more than a month. That puts the political meeting on December 14 in question – as it should be.
By the time of the December meeting, the Fed will have two more datasets on jobs, inflation and supportive players like retail sales. So far, the CME Fedwatch tool shows that 62.5% believe December’s hike will be “only” 50 basis points versus 23% who see 75 basis points. But if the economy remains resilient and resilient, particularly the job market, the Fed could go all out and overshoot in December. We expect to hear the word overshoot any minute now.
We will receive the September meeting minutes on Wednesday, which will certainly reinforce the hawkish view. Note that we also get the PPI ahead of the CPI on Wednesday, with the headline expected at 8.4% yoy from 8.7% in August and the core unchanged at 7.3% yoy.
The big news this week is the CPI, last seen at 8.3% in August versus 8.5% in July and the lowest in 4 months. The consensus forecast calls for a headline of 8.1% and a core of 6.5%, up from 6.3% in August. The Cleveland Fed sees a headline rate of 8.04% for September, a decent drop, and a core rate of 6.58%, a scary big rise.
The focus on oil and gas seems misplaced. Gasoline is rising and inventories are falling (actually normal for this time of year), but natural gas prices are falling. According to Trading Economics, prices are close to the 3-month low and last week saw the biggest increase in inventories.
By Friday, when everyone is exhausted, retail sales are forecast slightly at 0.2%m/m versus 0.3% in August. It may be important that non-car sales are expected to be negative at -0.1%m/m if less negative than -0.3% in August.
Retail sales are important as part of “real personal consumption spending,” one of the Atlanta Fed’s key GDPNow components and something that pushed Friday’s Q3 forecast to a whopping 2.9%, up from 2.7% just days earlier and a lousy 0.2%. on September 21st. We’ll get a new version on Friday. For what it’s worth, we get the first estimate for Q3 from the government on October 27th. Bloomberg forecasts 1.5%. In practice, the Atlanta Fed is overshooting and Bloomberg is probably closer, but whatever – neither number is negative.
Also on Friday we get preliminary University of Michigan consumer sentiment for September, likely little or no change.
In other news, the IMF and World Bank hold their annual meeting in Washington with a grim message that world growth is falling off a cliff and central banks are being overly aggressive and hurting the poor. China is gearing up for the Communist Party congress set to install Xi for life. Concern has shifted from Taiwan to what China will do about the new US chip rules, which could cost China (and the US in the long term) dearly.
There’s a lot of new development and data coming this week, but perhaps simply put we think what matters for forex is those returns.
What about “global financial market instability”? The UK issuance was not a Lehman moment and is unlikely to be. We shy away from continued use of the word “crisis”. UK bonds are still selling and the 10-year yield is up 0.091% to 4.328%, partly as the BoE announces an expanded plan to increase purchases and also introduces a long-term facility to address liquidity problems. The BoE wants the market to know it’s not trying to cut yields, just making adjustments for liquidity reasons, and it looks like a success. Bloomberg reports, “The Treasury also made its own attempt to calm markets, with Chancellor Kwasi Kwarteng saying he would announce his medium-term fiscal strategy and associated economic forecasts on October 31, ahead of schedule.”
One might think these developments would be good news, but sterling fell nonetheless, likely because Truss’s damage control is just beginning. She is meeting with Tory MPs this week to fend off those sending messages of “distrust” and possible resignations. As noted last week, public opinion remains firmly against the Tories.
But political turmoil is different from financial market instability, which not every commentator appreciates. Similarly, we see sanity restored in those analysts who suggest that good news (e.g. payrolls) is bad news for the stock market, it’s not about the news itself, it’s about expectations of what the Fed will do. Since this consists of maintaining a course already set, blaming the Fed for Friday’s sell-off is pretty silly.
treat: The always annoying but usually correct Krugman noted Friday that “the cost of shipping a container across the Pacific, which was $20,586 in September 2021, is now $2,265.” This does not mean that supply chain problems have disappeared, but it does mean that inflation from this cause has eased. Another source confirms this, saying that the backlog at Southern California ports “reached 109 container ships in January last year but has dropped below 10 more recently. Meanwhile, the cost of shipping a container from China to the United States has fallen below $4,000, compared to last year’s peak of around $20,000.” [as of Sept 29].”
In confirmation, the WSJ Daily Shot delivers these dandy charts. Note that on a 3-month basis, prices have fallen the most in 5 years.
Treat 2: British Prime Minister Truss is insanely unpopular, with a rating lower than Boris at his lowest. Bloomberg quotes people saying things like: “Just four weeks into office, the Conservative Party Conference in Birmingham was all about whether British Prime Minister Liz Truss will survive until Christmas.”
Even the Tory’s staunch homeowner demographic is disillusioned as they face soaring mortgage rates and their monthly expenses increasing by up to 70%.
(That’ll teach them how to levitate.) And people recognize that a lot of “nanny state” regulations are actually a good thing, like seat belts. Truss does not want to publish information about how households can save energy because it is too “interventional”. Check out the chart – you’ll be fine if you turn off the central heating in favor of the fireplace and hang your linens and towels to dry instead of running the electric dryer.
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