Again, better PMI's point to more inflation
|Outlook: We might be getting a classic pullback Tuesday, but if so, it’s without much momentum. The tone is consolidative, but we may have to wait until later in the week for the big traders to position themselves ahead of next week, which will be a doozy—China’s return from this week’s holiday plus all the majors (except Japan) holding central bank meetings—the Fed, BoE and ECB. This is like a trifecta in horse racing and you have to be brainy to calculate odds.
So far today the better flash PMI readings in the eurozone are driving the euro up against the GBP and Swiss franc (but not the yen), helping build the ongoing opinion that the ECB will do only 25 bp next week, whatever the hawks and chief Lagarde say. This is like the futures and swaps markets in the US betting the Fed will have stopped hiking and will be cutting by next fall. Even the marginal PMI gain in the UK has driven some analysts to say out loud that maybe the BoE does 25 bp instead of 50 bp, too.
This lack of respect for central banks’ crystal clear forward guidance is a bit upsetting. First, less-bad data is not good data. And flash PMI’s are not the target of central banks. Inflation is the target. If anything, better PMI’s point to more inflation, not less. Keep that in mind when we get the US PMI’s.
One analyst noted in Bloomberg points out that what really counts when evaluating whether we will dodge a recession is “new orders.” We never like single-factor explanations but this is not a bad one. See the chart from Trading Economics. We get the new number of Thursday with the durables report. It’s interesting that the Nov number was -2.1% but the consensus for Dec is 2.5%, quite a reversal. Trading Economics own forecast is 2.2%, still a reversal. Again, better PMI’s point to more inflation, not less.
We might be in something of a holding pattern until some fresh data inspires a breakout, but a breakout ahead of central banks would be a rare thing. We will probably have to be content with a tepid dollar pushback.
Gold: Remember some goofy stories not too long ago about who is buying gold? Turns out it was Turkey. Story: Teaching at the School of Banking managed by Citibank in the 1980’s and having a beer with the students (all bankers themselves), we were told that every single person in Turkey has a private stash of gold under the mattress or buried under the carrots in the garden. Every single person. The reason—intermittent but inevitable financial crises. We find the story entirely credible and besides, the source is reliable (ANZ).
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