“If Fed policy were truly data dependent, the case for a rate increase at the June meeting would be an easy one to make, in our view.”
That’s a quote from an FOMC preview penned by TD’s Oscar Munoz, Gennadiy Goldberg and Molly McGown. Their point was simple. All “lags” — “long,” “variable” and otherwise — aside, the incoming data argues for additional Fed hikes.
The labor market continues to outperform expectations, wage growth may be moderating but it’s not consistent with the Fed’s definition of price stability, consumer spending is resilient and, crucially, there’s been no real progress on the “super-core” measure of inflation that Jerome Powell insists is key to achieving the Fed’s goals.
Long story short, the case for a pause rests entirely on the idea that the tightening delivered thus far, in conjunction with the impact of the regional banking stress on lending standards, will ultimately prove sufficient to curb demand and bring down inflation. Data due this week probably won’t support that case.
Consensus expects to hear that core inflation in the US rose 0.4% in May from April. An in-line print would mark a half-dozen months in a row of 0.4% MoM core CPI prints.
That isn’t going to cut it (no policy pun intended) when it comes to restoring inflation to target expeditiously.
I think it’s important not to lose track of the uncomfortable reality for people whose lives are materially impacted by the current rate of inflation: For some categories of services (and even for some categories of goods), deflation isn’t in the cards, which means the dramatic uptick in prices seen following the pandemic is permanent. In that respect, the Fed can’t atone for whatever part of this debacle can be laid at their feet.
But, water under the bridge I suppose. As long as you make at least $250,000 (or $400,000 in the nation’s most expensive locales), you won’t notice the difference assuming annual price growth does eventually recede back below 4% or so. For everyone else… well, just remember that America is a meritocracy where hard work always pays off and equality of opportunity is guaranteed. If you’re not a multi-millionaire, it’s self-evidently your fault, but the good news is, you too can drive an X5 to Whole Foods if you just put your mind to it. “Poor” is a state of mind. Just SNAP out of it. (I’m being sarcastic, of course. America isn’t a meritocracy. That’s a cruel, ridiculous myth.)
It’s possible, though unlikely, that a core CPI print in excess of 0.5% would tip the scales in favor of a Fed hike on Wednesday. The same could be said of a prospective sharp acceleration in the super-core measure, given the relationship between those categories and wages. In all likelihood, though, another elevated core CPI reading will just serve to contextualize and justify the hawkish statement language and upward dot plot shift that’ll likely accompany June’s pause (or June’s “skip,” if you prefer).
In addition to CPI, retail sales for May will give the market (and officials) a fresh read on nominal spending. Consensus is looking for a modest decline (0.1%) on the headline, but appearances can be deceiving. April’s headline retail sales miss belied a fairly robust set of numbers under the hood, and notwithstanding cautious commentary from the likes of Dollar General, there’s scant evidence to suggest consumers have reached any kind of definitive breaking point, even as sentiment remains subdued.
Speaking of sentiment, the preliminary June read on University of Michigan’s survey is due Friday. There’s some risk around the report. Recall that May’s preliminary results included an elevated longer run inflation expectations print which, even after a downward revision in the final reading, still counted as high.
It’d be a bad look for the Fed if a pause on Wednesday is followed by another uptick on the Michigan inflation series less than 48 hours later. As a reminder: Policymakers do watch that series.
Also on deck in the US during Fed week: PPI, NFIB (markets will be keen on any additional evidence that small businesses are experiencing tighter credit conditions) and jobless claims, which will be eyed closely after last week’s spike, the largest in nearly two years.
Oh, and China is due to release monthly activity data mid-week. Markets have turned quite gloomy on the prospects for the world’s second-largest economy lately. The update could underscore investors’ trepidation, although Beijing’s distaste for “one-way bets” may eventually manifest in “surprise” beats on some key macro aggregates.
I would buy what is being sold here except the fed was short of their inflation target for about 12 years. Maybe transitory was the wrong word. But I will bet that we are entering a period of disininflation now. Fed funds target is 5-5.25% and cpi is lower 4 handle so there is zero case that the Fed is behind the curve now. Service inflation moves slowly and with a lag, but goods inflation, which a leading indicator has been heading down. You have tightening lending standards estimated at the equivalent of two or more rate hikes. You have an inverted us treasury yield curve and a strong us $. The hawks are going to back in their coups very soon.
I’m not “selling” anything. I’m telling the truth about the situation. You’ve been saying the same thing for the better part of two years and you’ve been wrong every step of the way. The only reason I feel compelled to say that is because you’ve been (very) abrasive in your criticism of those who argued early on and consistently that inflation was a problem and that the Fed was hopelessly behind the curve. To this day you’re unwilling to concede that those folks (every, single one of them, including and especially the handful you’re fond of calling out by name) were exactly right where you were unequivocally wrong. You even criticized me on a few occasions, and at no point have you so much as alluded to the fact (and let’s not skirt the issue, it’s a fact) that you’ve been on the wrong side of this from day one and remain so currently. It’s obvious you’re never going to concede this, so I’m not sure there’s much point in my calling it out, but as other readers have noted in response to your comments, the obstinance and repetitiveness is pretty glaring, and I really don’t think it’s helpful.
I’d tend to agree that disinflation is setting in. Only the impact of Covid on oil and supply chains really drove inflation to where it went. And, consider we are just a few years from energy being dirt cheap again. We just saw the rest of OPEC tell Saudi Arabia to go pound sand literally. I’ve been calling it “panic pumping” what is coming. Combine nations pumping what they can sell and use with massive solar and battery storage and you can see oil back in the $40s around the time the Boomers are all on Medicare later in the decade and trigger the next crisis to justify massive QE. I a few years we’re going to be talking deflation again.
The monetary arguments ring hollow as we have been fighting deflationary forces since the Financial Crisis. Aging demographics, massive debt and technology are all far stronger than central banks half counter cyclical measures. In a few years we’ll be talking deflation again as the Baby Boomers get fully on Medicare. That will drive more deficit spending until a few of them decide to move onto the great beyond. The Boomer retirement crisis will result in massive QE and a super bull market and expansion as the pension-less Millennials work til they’re 75. We’re setting up for a generational boom with the Millennials in their peak earning years and Boomers slowly kicking it. Along the way both the dollar and Bitcoin will go higher. Why Bitcoin? Because as bad as it gets in America, it’s worse in Japan, China and Europe. Everyone will want Bitcoin as a hedge against the dollar not getting too weak, but too strong. It’s a really clean dirty shirt.
It’s hard to move people off their biases, cognitive or otherwise. So here’s mine: the rent is too damn high. What the U.S., and the rest of the developed world, needs is deflation, not just disinflation. It will happen. The only question: suddenly (bad) or gradually (better). I think Jerome Powell, a smart technocrat, is doing everything in his power to tilt things towards the latter. I wish him the best, truly.
Millenials/Gen Z already has a mindset that they won’t ever get as much from the US social security programs as the Boomers are getting. This mindset is leading them to delay/ forgo many life milestones previous generations did on an earlier timeframe (marriage, kids, purchasing a home).
I am astounded when I talk to my kids and their friends who all believe and state ( as if this is not something they can change) that they better save for their own retirement because they won’t be getting much at all out of social security.
It doesn’t seem that the US is entering a protracted period of de-leveraging, in fact, people are willing to leverage up in order to keep spending. US personal/ household debt ( from various World Bank/IMF sources available from Duckduckgo search) is approximately $62,000 on average vs average personal income of $59,000, or 105%. China is closer to 110%, Japan is 120%, New Zealand is 135%, UK is 133%, France is 105% (I am here now- everyone is out, spending money in cafes and bistros-and I am not in a touristy area), Australia is 167% (whoa- maybe the data I looked at isn’t correct??), Canada is 152%, and Germany is 88% (so Swabian).
My point with all of the above is that in the US, if young people think everything is going to be delayed and they are going to have to work longer to save for their own retirement- they aren’t going to stay home during their 20’s-30’s- even if it means they have to load up their credit cards. And compared to some of these other countries- the US isn’t yet maxed out on personal debt.
YOLO.