One of the things that I certainly hope was not lost on folks this week was just how critical the February payrolls number truly was in the context of the effort to find evidence that “Goldilocks” is alive and well. After all, she’s got a habit of hanging out with and implicitly taunting bears.
The blowout headline number was obviously nice, but more critical to the narrative was the below-consensus AHE print. Solid growth + still anchored inflation = Goldilocks. More specifically, the report clearly suggested there’s still slack in the labor market which gives the Fed some plausible deniability if they continue to come across as gradualistic only to see the data suddenly inflect like it did in February.
That came just a day after Draghi stuck the proverbial dismount by negating the FX impact of the removal of the dovish APP bias from the ECB statement by pairing it with a slight upward revision to the near-term growth outlook and a slight downward revision to the 2019 inflation forecast. So he laid the groundwork for ending APP and then reinforced Goldilocks 45 minutes later. Then, for good measure, Bloomberg ran a story later in the day that tipped a taper to €10 billion/month starting in September – i.e. no cold turkey on APP.
Then, on Friday, Kuroda talked down speculation that he’s thinking about how the BoJ might go about exiting stimulus (thankfully, he’s tied that exit to an inflation target he’ll literally never hit, which means he’ll never have to exit anything if he doesn’t want to, kind of like: “I’ll quit drinking if I ever wake up one day and discover that I’ve grown a set of wings”).
Ok, so having the still-subdued inflation pillar of the Goldilocks narrative reinforced is critical because it ensures the downward trajectory of the black line in the following chart doesn’t become even steeper than it’s projected to be:
But if rising price pressures are imperiling one pillar of the Goldilocks narrative (and don’t forget, it’s that narrative that underpins the low vol. regime), the threat of a trade war is imperiling the other.
“The global Goldilocks scenario of robust growth and limited inflation pressure is facing some clouds on the horizon,” Barclays writes, in a piece called “Goldilocks Is Nervous.”
“The recent softness in some economic data is of limited a concern, but a global ‘trade war’ would pose a more serious risk,” they continue.
Here’s more color:
Regardless of the validity of the rationale for the new tariffs (e.g. national security, dumping, etc), disrupting global trade flows would likely have negative consequences for global growth as an immediate consequence. Our analysis of globalisation trends highlights the importance of Global Value Chains (GVCs) in an increasingly complex global trade system. Disrupting these GVCs would most directly expose economies that are most deeply integrated into GVCs (e.g. East Asia and CE), but the effects would spread quickly, also weighing on sentiment more broadly. Given significant labour cost differences, the most immediate effect is likely to be upward pressure on prices rather than meaningful ‘re-shoring’ of activity.
It’s against that backdrop that the central bank roulette described here at the outset is playing out. As we’ve said repeatedly, the trade war threat complicates the equation immeasurably and is precisely what DM central banks did not need, especially considering their exit plans are already being thrown for a loop by the resurgence of expansionary fiscal policy. Here’s Barclays documenting the “varying” messages we’ve heard over the past seven days:
Central banks vary in their messages. BoJ Governor Kuroda suggested this week that any ‘exit’ would have to wait until FY 2019, which led us to push back our call for changes in the yield curve target to April 2019 (from Q3 2018). In contrast, signals out of the Fed remained hawkish, as Fed governor Brainard— a known ‘dove’—delivered a hawkish speech this week. This further buttresses our expectation of four hikes in 2018, and an above-2% CPI print for February should do as well. The ECB met this week against a difficult backdrop: in Germany, the SPD membership’s vote in favour of a Grand Coalition paved the way for a new government with a seemingly Europe-friendly focus; but Italy’s general election showed strong support for antiestablishment parties, casting doubt on the reform course of the euro area’s most highly indebted economy. In the event, the ECB removed the easing bias in its statement, while in parallel slightly revising down its headline CPI forecast for 2019.
Again, this is an absurdly difficult balancing act and the potential for a “mistake” has grown materially over the past two months, not because of anything central banks have done “wrong” (of course you could argue that the whole post-crisis approach was “wrong”, but that’s another story), but rather because the Trump administration has lobbed a series of live grenades into the fray.
Let’s hope Goldilocks is ready…