Perfect storm ahead? Toxic political/monetary policy brew on tap?
More to the point, will we get a hawkish spin on a Fed hike combined with an upward shift in the median 2018 dot and will that end up colliding with the first serious effort by Donald Trump to disrupt the Robert Mueller probe?
Probably not, because let’s face it, shit never turns out to be as “fun” as it could be, but hey: fingers crossed!
If you need a summary of all the latest developments inside the Beltway, you’re in luck because we endeavored to provide you with just that in “Come One, Come All! Recapping The Trump Circus Ahead Of A Pivotal Week.”
Suffice to say it’s a truly epic clusterfuck and markets will be on high alert for Mueller headline risk over the coming days. Comments out of John Dowd and Trump’s weekend tweets suggest the President’s “strategy” (if that’s what you want to call it) with regard to the special counsel has shifted. It looks like he might be ready to go on offense, with God only knows what consequences.
When it comes to the Fed, the most important thing for markets will be the dots. For their part, Goldman and BNP are looking for the median 2018 dot to shift up, signaling four hikes this year. Here’s Goldman:
Public remarks by Fed officials suggest a broad shift in the committee’s outlook towards a potentially faster pace of tightening, and we expect the median dot to show four hikes in 2018, up from three at the December meeting. Additional hawkish changes—a move to three hikes in 2019 or an increase in the longer-run funds rate estimates—are also possible but not our base case.
And here’s BNP:
We expect the four things from the FOMC’s March meeting: 1) a 25bp hike in the fed funds rate to 1.5-1.75%; 2) upward revisions to its economic forecasts, especially for GDP growth; 3) upward revisions to its rate dots so that the medians imply four hikes for 2018, two for 2019 along with lifting the longer run dot by 0.25pp; 4) Chair Powell to reiterate that headwinds are shifting to tailwinds in his press conference.
To be sure, not everyone agrees with that. Take BofAML for instance, who wrote the following in their preview:
We think the median forecast holds at 3 hikes for this year but shifts up slightly in the out years, including 2019 and the long-run. We expect an additional 25bp of forecasted rate hikes relative to December.
And here’s Barclays:
We expect an unchanged median for 2018 and 20bp increases in the median funds rate in 2019 and 2020. We see the average funds rate rising 10-20bp across each of the three years. We view the committee as more likely to move to four hikes this year at the June meeting, when incoming data affirm that fiscal stimulus is having the anticipated effects.
Of course the dots are hardly the only thing that matters. The growth outlook is expected to be revised higher and for their part, Goldman thinks the inflation forecast is likely to tip a modest overshoot in 2020. As far as the unemployment path, it seems likely that will be revised lower. Below, find a summary of projections for the projections (and no, there are no typos there).
Needless to say, there are more, but you get the idea.
There’s considerable risk around the press conference. This is Powell’s first go at it and it will be a trial by fire. He’s going to need to try and thread the needle by somehow coming across as hawkish, but not too hawkish and that will be made immeasurably more difficult if the median dot for 2018 shifts up. We’d imagine “someone” will be watching from her living room grimacing at every misstep and fuck up:
Additionally, you’re reminded that the most recent big data point (retail sales) was a pretty egregious miss and while the February jobs report was obviously a blockbuster, the retail sales fumble served to deep-six a lot of folks’ GDP tracking estimates, and that casts further doubt on the relative wisdom of getting too hawkish, too fast. On the other hand, it’s far too early to sound the all-clear on the inflation scare, meaning it’s still possible to accidentally fall behind the curve by remaining too gradualistic (assuming of course that with all the models now broken, the phrase “behind the curve” still has any meaning).
Meanwhile, barring something dramatic on Monday and Tuesday, this will play out against renewed flattening which, when taken with last week’s lackluster equity performance, suggests markets have quickly moved from being worried about an inflation-induced tantrum, to a curve inversion and what that would entail for the economy.
For more on curve dynamics and the implications for the Fed, see “Breathe In, Breathe Out“.
Assuming nothing monumental comes out of the new SEP, things might remain some semblance of calm, but as Bloomberg’s Brian Chappatta writes in his preview, “that would do little to cool the curve-flattening fervor that’s staged a comeback in the past few weeks.”
Again, I guess what I would say here is that if something goes “wrong” with all of that and we get too much President Dennison over the course of the week, it could be a toxic brew. Although full disclosure, for those of us who perversely take pleasure in Trump’s ongoing trials and tribulations, there’s no such thing as “too much” Dennison.
This is all playing out against an aggressively expansionary fiscal backdrop that’s thrown the Treasury supply/demand picture for a loop, raised questions about the outlook for the dollar given the deteriorating fiscal outlook, and added fuel to the fire in terms of inflation concerns. Additionally, the Fed will need to try and balance all of this against the threat posed by Trump’s protectionist push.
But hey, that should all be fine, right? After all, we’re in the capable hands of Larry Kudlow now.
And it’s not just the Fed, we’ll get the BoE this week and that will come just two days after UK CPI and amid the never-ending Brexit boondoggle which to be perfectly honest, is so convoluted that trying to keep track of it is an exercise in abject futility. The BoE won’t do anything this week (May is in focus – in more ways than one), but there’s more than a little ambiguity going on here. Just to give you an idea, have a look a the headings for the various subsections in BofAML’s BoE preview:
- We expect BoE to stay hawkish despite data saying no
- Because Carney said go
- Or did he?
- The data say no
- But the BoE already went all in
- Or did it go all in?
- What about transition?
- Market puts high hurdle to BoE changing their mind
- We assume no news next week, but risks abound
Good luck with that. “We do not think that the March BoE meeting will weaken sterling either this week,” Barclays writes, in their attempt to try and boil all of this down into something that’s digestible. They add: “While unchanged policy is widely expected, SONIA markets still price about an 80% likelihood of a 25bp MPC rate hike in May and the MPC’s statement will likely be consistent with current market pricing.”
Mercifully, there’s not a ton on the docket other than the Fed and the BoE, but again, the dearth of “known unknowns” from markets is more than compensated for by Trump, who you can bet your ass will keep things exciting.
Oh, and remember, he’s “not ranting and raving” – he “loves doing this”…
Full calendar from BofAML