Donald Trump and his “very large brain” spoke to the Wall Street Journal about trade on Monday and unfortunately, the Journal decided to publish what the President (and his brain) said.
Unsurprisingly, Trump came across as needlessly combative and overtly obstinate on tariffs ahead of the G20, which served to throw cold water on Monday’s risk-on mood.
That set the tone for Tuesday, and assuming Trump doesn’t grab the spotlight with some fresh trade balderdash, the market will zero in on Richard Clarida’s speech.
Two Fridays ago, everybody seized on comments from Clarida who, in an interview with CNBC, appeared to try and walk back Jerome Powell’s “long way from neutral” debacle which many point to as the catalyst for the October rout.
Interpretations of Clarida’s comments vary, but the contention that the Fed is considering a pause (or perhaps even a hard stop) in March or, at the latest, in June, was seemingly validated last Wednesday when MNI reported that “senior” policymakers are indeed starting to get cold feet about the rate path.
Read more about the big week in Fedspeak
As Clarida kicks off a big week for Fedspeak, we thought we’d highlight some commentary from Albert Edwards’ latest note, out on Monday (which is surprising, as Albert usually writes on Thursdays).
Edwards starts by flagging the obvious, which is that “market confidence that the Fed will deliver the promised three rate hikes next year is evaporating.” As of this morning, markets are pricing in just ~29bps of tightening in 2019.
Albert also flags the recent aggressive paring of the spec short in the 10Y, which was rebuilt slightly in the week through last Tuesday after being trimmed by the most since April 2017 in the week ended November 13.
“Why would the Fed end its tightening cycle prematurely when it has been so hawkish in recent months?”, Edwards asks, before wondering aloud if “economic growth [is] about to slump?”
After citing an ostensibly hawkish Quarles speech from October and warning that just because the U.S. and Europe are headed for a Japan-style deflation over the longer-haul doesn’t preclude a near-term, late-cycle inflation overshoot in the U.S., Edwards notes that the recent turmoil in commodities is probably a coal mine canary for the global economy. As is customary, he then cites David Rosenberg.
One of the joys of following David Rosenberg on Twitter (@EconguyRosie) is that he always seems to come up with new indicators I have never seen. His latest is the FIBER leading economic index (link, see below), which confirms the slowdown the ECRI is also flagging.
But the biggest takeaway from Albert’s latest is probably the reiteration of analysis from SocGen quant Solomon Tadesse, whose “degree of tightening” chart has been making the rounds for months.
“Our very own Quant guru, Solomon Tadesse, did some really interesting work back in May this year showing that the Fed’s monetary tightening was already close to what would historically trigger a recession”, Albert reminds you. Here are the charts on that:
In May, Tadesse suggested that the Fed would tighten “an additional 75bp from the current level, which translates into about three Fed hikes.”
Well, as Albert gleefully notes, “if the Fed indeed stops tightening after the December hike, Solomon will be spot on and win my forecaster of the decade award!”
Meanwhile, Edwards’ other colleagues at SocGen (including Subadra Rajappa) see the Fed delivering two additional hikes in 2019 following an expected hike in December.
After H1 2019, Rajappa says the Fed will run into trouble trying to squeeze in additional hikes and as such, next year “will likely bring us one step closer to the end of this rate hike cycle”. She then reiterates the SocGen house view that the U.S. economy will head into a recession in the first half of 2020.
So that’s a summary of what the folks at SocGen are thinking ahead of this week’s bevy of Fed speakers and the release of the November minutes.
Draw your own conclusions.