Sincere And Prudent

Sincere And Prudent

Equities will have their say on March’s blockbuster US jobs report — on a delay.

The S&P breached 4,000 prior to Good Friday, and likely would have enjoyed another bump on the heels of a headline payrolls print that came in near the top-end of the range.

That said, abbreviated action in rates found market participants once again looking to pull forward Fed hikes. In the past, that would risk triggering the “good news is bad news” dynamic, wherein blockbuster economic data dents risk assets thanks to the assumed read-through for monetary policy.

Read more: Give Me Fives

Those skeptical that the first hike or (gasp) two is still some three years out argue that because more data blockbusters like the March jobs report are virtually inevitable, it will become quite difficult for the Committee to explain why those numbers don’t count as “substantial further progress.”

On the other side (and as detailed in the linked article above), this a multi-step process. The Fed needs to taper asset purchases before it thinks about hiking and Jerome Powell has made it clear that he intends to give the market ample warning by telegraphing any intention to start discussions around paring monthly bond-buying. The problem (and I’ve been over this before) is that it has the potential to become maddeningly recursive. That is: You need to preempt the tapering debate by telling the market you plan to have it, but the market will invariably react to that as though you’d already started having the discussion. That then necessitates even more preemptive telegraphing.

In any case, the point is that between the protracted timeline on an eventual taper and the Fed’s tweaked mandate language which makes fostering inclusivity part of the employment side, there’s an argument to be made that pulling forward rate hikes is a fool’s errand, especially given Powell’s at times irritated insistence on reiterating that the Committee means it when it says the Fed will need to see actual, realized inflation overshoot target before the tightening discussion can begin.

It’s with all of that in mind that the market will parse the March Fed minutes this week. Anyone looking for excitement should probably curb their enthusiasm. “Our expectations for any grand revelations are limited, after all the meeting itself didn’t yield any policy fireworks,” BMO’s Ian Lyngen and Ben Jeffery said. “We continue to find it notable that the market appears to be trading as if the Fed will respond to an improving inflation outlook in a way comparable to its pre-pandemic protocol – i.e. by getting sufficiently in front of spikes in consumer prices to reinforce policymakers’ inflation-fighting credibility,” they added.

The reaction function has changed. Powell spent a good portion of his post-meeting press conference last month reiterating as much. Markets still don’t seem to believe him, though.

“Our recent pre-NFP survey showed respondents are looking for the first hike of the post-pandemic era to occur in Q1 2023… sooner than the Fed’s beloved dot plot, but loosely conform[ing] to the window between ending the last round of QE and that cycle’s first hike,” Lyngen and Jeffery went on to say, adding that they’d “be wary of any more aggressive tightening ambitions as a precursor for the Fed to attempt to, once again, walk back such expectations.”

In addition to the March minutes, ISM services is on deck. Last week, I (very calmly, using no hyperbole) described the hottest read on ISM manufacturing since 1983 as “a giant screaming fireball.” The headline print on the non-manufacturing gauge in February was a nine-month low and stood in stark contrast to its scorching manufacturing counterpart. Consensus is looking for a rebound from February’s 55.3 (green line in the figure below) all the way up to 58.5.

All eyes will, as usual, be on the prices gauges. In February, the services prices paid index jumped sharply from 64.2 all the way to 71.8.

Other than that, traders will get PPI and, of course, jobless claims, as well as a bevy of Fed speakers including Powell on Thursday.

The IMF’s spring meeting starts Monday with the new World Economic Outlook due the following day (so, Tuesday, if history is precedent). An upgrade to the Fund’s 5.5% global growth estimate (figure below) is likely.

Last week, the Fund called for the world to adopt more redistributive tax policies and to take other steps towards “giving everyone a shot” (and, yes, the vaccine pun seems to have been intentional). Also in focus will be a plan to allocate new SDRs, a proposal Janet Yellen supported to the chagrin of some US lawmakers. A formal vote won’t come for at least three months.

Market participants will continue to cast a wary eye towards Europe, where vaccine rollout is hampered by all manner of snafus. On Sunday, French Finance Minister Bruno Le Maire slashed the country’s growth outlook by a percentage point (to 5% from 6%) in the wake of a new four-week lockdown. “Closing schools and 150,000 businesses is essential to curb the circulation of the virus. But these measures will have an impact on the French economy,” Le Maire said, in remarks to Le Journal du Dimanche. “This estimate is both sincere and prudent.”

That’s fine. After all, the world has a shortage of sincerity and prudence, so any new supply is welcome.

6 thoughts on “Sincere And Prudent

  1. The FED wants to stoke inflation not fight it, so why would the rates committee hurry to get in front of a spike in consumer prices? If market participants think we need to address inflation now, they need to speak to their local bond vigilante. In the meantime, rates are headed higher — and Powell is fine with that.

    1. Most every market participant of note on Wall Street only remembers the fighting inflation paradigm starting in the early 80s that has defined Fed behavior with regards to rates ever since. I think it’s hard for a lot of these participants to accept that Powell is actively changing that framework.

  2. As a novice market participant in the 70s I was taught to believe that the bond guys were way smarter than the stock guys. But a lot of this speculative angst about total protonic reversals and other inflation indicators is beginning to sound not unlike a reddit chatroom. Powell and the Fed are more Peter Venkman than Sta-puft marshmallow man.

  3. An investor could assume that the Fed is going to act exactly as it has stated with rate hikes at least three or four years away. With the pandemic and economic problems in Europe, Brazil, etc., a temporary spike in inflation/reflation could be followed by long-term low inflation rates; a strong dollar imports disinflation and higher treasury yields encourages a stronger dollar. In such an environment, growth (e.g. “FANG”) stocks and bond funds (at the yields peak) might do fairly well. But who knows? The relations between the US and China will affect everything.

  4. Silly me but I await M2V Q1/21. What has been going on has no precedent. Past correlations and conjectures are not applicable. The nature of, and real world workings of Fiat currency are still being realized. MMT is itself still a conjecture of and viable view of Fiat. As humans we always make it somehow work and the sky will always be falling.
    FRED Blog

    “Posted on August 21, 2014
    It is quite common to see arguments that if M2 velocity (the nominal GDP/M2 ratio) is low, it must be that inflation is high. While M2 velocity is currently at historical lows, inflation is clearly not high. Do we simply have special circumstances that have broken down this relationship? Is there such a relationship in the first place? ”

    How bad was inflation in 2014? We have no idea what inflation is. The Bond and Oil guys may be way ahead of themselves.

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