Traders Await Crucial US Data As Biden Confronts Dismal Polls

A slate of top-tier US data greets market participants in the new week, as equities look to build on what most analysts contend is a bear market rally.

Over the past two weeks, a combination of flows and positioning served to sling-shot equities higher despite an extraordinarily daunting macro backdrop defined by war, inflation, decelerating growth and a lingering pandemic. Monetary policy is less supportive amid efforts to quell price pressures. If you believe the Fed, policy will turn mildly restrictive in the US sooner or later. For what it’s worth, markets don’t believe the Fed, even as most (if not all) analysts do.

Morgan Stanley’s Ellen Zentner joined Goldman in predicting back-to-back 50bps Fed hikes in May and June, followed by 25bps per meeting for the balance of the year. Although Zentner’s new forecast implies a steep policy trajectory in the near-term, the longer run is less certain. If inflation doesn’t abate, the Fed could stick to 50bps increments after June, she suggested, while simultaneously noting that if price pressures abate in 2022 (as opposed to the 2023 easing she sees), the Committee could adopt a softer approach. Zentner lowered her GDP forecast to reflect the effects of monetary tightening.

In short, the threat of stagflation casts a long shadow, and it’s under that shadow that investors will assess March payrolls, expected to print 475,000 on the headline (figure below).

An in-line print would extend an uninterrupted stretch of gains, and additional evidence of hot wage growth would harden the case for aggressive rate hikes aimed at preempting a wage-price spiral.

Real wage growth is still negative, and six of the last eight recessions were accompanied by negative real wages. Investors will get an update on the Fed’s preferred price gauge Thursday, alongside another snapshot of the consumer.

February’s personal income and spending data are somewhat stale given the onset of the war late last month, but the figures will be parsed for evidence of household retrenchment in the face of generationally high inflation.

The headline PCE gauge likely accelerated at a 6.4% annual rate last month (figure above), more than triple the Fed’s target.

“Commodity prices are on course for their best year since 1915,” BofA’s Michael Hartnett wrote, reiterating a point that scarcely needs more press. The annotated figure on the left (below) gives you some context.

The “past two years of pandemic, lockdowns, civil unrest, insurrections, blue waves, war, excess monetary/fiscal stimulus and broken supply chains have ended with epic Main Street inflation,” Hartnett went on to say.

Government bonds are on track for their worst year since 1949.

Between soaring inflation and the war (which are now inextricably bound up with one another), Joe Biden’s approval numbers touched a new record low in an NBC poll (figure below).

Just 12% of Americans have high confidence in Biden’s handling of the Ukraine crisis and 80% fear nuclear war. The final read on University of Michigan sentiment was abysmal, reflecting concerns over an erosion of living standards as prices for food and gas continue to rise.

Democratic pollster Jeff Horwitt highlighted the absence of a “rally around the flag” phenomenon. “The potential for that to occur could still happen if America becomes more directly involved [in the war], but at this stage it is not there,” Horwitt said.

Only 6% of Americans blamed Vladimir Putin for inflation. 38% blamed Democrats, 28% COVID and 23% corporations. Horwitt’s GOP colleague said simply, “You cannot get down to the low 40s in presidential approval unless you have strained your own base.”

Frankly, I’m not sure Biden cares. From the beginning, he seemed prepared to step into an impossible position in order to pull the country back from what he pretty clearly believed was the edge of oblivion. America was (and still is) hopelessly divided, partisan gridlock meant legislating would be next to impossible on some key issues and around a third of the electorate is now unable to separate reality from fiction. But he ran anyway, and in addition to everything that was virtually guaranteed to go wrong given partisan rancor and the lingering effects of the pandemic, he got an inflation spiral and two foreign policy crises for his trouble.

Again, though, Biden is likely to be content as long as i) at least he believes he’s doing a good job, and ii) his predecessor doesn’t end up back in power in 2024. And therein lies the problem. In order to prevent Trump from muscling his way back into the Oval Office, Biden needs to restore at least some faith among the electorate. Sky-high inflation is a political death knell and when it comes to Ukraine, it’s far from obvious that Americans will continue to identify with the cause. Once the (perceived) threat of a Russian nuclear attack recedes, Americans are likely to lose interest in the conflict, especially if it reverts to some version of the intractable Donbas quagmire that existed pre-invasion.

Eventually, all that’ll matter to American voters is their own economic situation. With exceptions (and respect) for all those who continue to serve in one capacity or another (whether as a first responder, a nurse, an elementary school teacher or a Marine), Americans aren’t exactly a selfless lot. The populist wave that gathered momentum starting in 2015 hasn’t really receded. As unfortunate as this is, winning US elections is likely to be very difficult for anyone not willing to adopt some version of the inward-looking, nationalistic demagoguery that won Trump The White House. What the GOP seems blissfully unaware of, though, is that such tactics are hardly the sole purview of the right. In fact, history is replete with examples of the left leveraging the strategy just as effectively, if not more so.

Also on deck stateside this week: Home prices, February JOLTS and ISM manufacturing.