The ECB rate decision is still up in the air

Outlook: The big event is still tomorrow’s CPI. A higher number (over 3.2%) will spur the hawks. A lower number will generate a re-think about the trajectory of rates. Right afterwards, the next day it’s retail sales and the ECB rate decision. The rate decision is still up in the air, which is ridiculous and can be considered bad messaging by the ECB.

Mish has a fascinating piece of the perception of “higher for longer.” He writes “On March 24, 2023, the market thought the March 20, 2024 interest rate would be 3.62 percent.

“Today, the market thinks the rate on March 20, 2024 will be 5.38 percent. That’s a huge difference of 1.76 percentage points, the equivalent of 7 quarter point hikes.” Twitter comments confirm the new bias. The move out in the estimates of the first cut has reached June 2024. But that would mean a good nine months of Goldilocks and Mish thinks that is not something that the markets will allow. 

Two points: forecasts are expectations forged in the fire of data, wishful thinking, and various other emotions—more emotion than data, and this is “sentiment.” As the trajectory of rate expectations shows, data played a small role in the forecasting. Secondly, to dismiss nine months of Goldilocks as unrealistic is also to make assumptions about how people will behave. While it’s true that market commentators cannot be happy with Goldilocks because it gives them nothing to gripe about, they might take the opportunity to dive a little deeper into data. We still do not understand how, exactly, this is not your Grandpa’s crisis. What are Covid economics, anyway?

Reuters wants us to add some data to our thinking about the Fed beyond inflation and retail sales, and to examine “the often overlooked NFIB small business survey for last month - not least to see whether credit tightening is starting to bite beyond the mega caps for a part of the economy that employs more than half of all U.S. workers.

And a factor there is the top story in Bloomberg about how “the American consumer is about to hit a wall.” The latest survey: “More than half of 526 respondents said that personal consumption — the most important driver of economic growth — will shrink in early 2024, which would be the first quarterly decline since the onset of the pandemic. Another 21% said the reversal will happen even sooner, in the last quarter of this year, as high borrowing costs eat into household budgets while Covid-era savings run down.”

“The enduring strength of the US job market has propped up household spending in the face of the biggest price increases in decades. It’s led some analysts to push out their expectations for a recession — or even scrap them altogether. Economists at Goldman Sachs Group Inc. expect the consumer to outperform yet again in 2024 — and keep the economy growing — amid steady job growth and pay hikes that beat inflation.”

Ah, and there’s the rub. Consumers keep spending even as credit card companies make life more expensive and even if pay raises do not match inflated prices. It’s the American way. Defaults on cards and autos are indeed rising, but the consumer who faces those problems is not the average consumer. The one item on the list of possible woes in the Bloomberg story is the resumption of student debt repayments. Bottom line—these analysts don’t understand the average American and our endless materialism. Besides, those whose net worth just went up and by a lot (home prices, stock market) don’t feel poor. See the chart from The Daily Shot.

Everything is rosy right now and growth should rise in Q3, but maybe it’s the last hurrah.

Forecast: We got the seeming upside breakout of just about every currency against the dollar, as expected. We say “seeming breakout” because it’s just one day so far, and one day does not a verified breakout make. We usually expect three to five days of countertrend moves before the breakout is shown to be false, and most breakouts are, indeed, false.

This time we may get just one day, if US inflation really does come in at 3.6% as the Reuters poll yesterday suggested. Again, CPI at any level is not going to influence the Fed, or at least not much, but a higher inflation number puts the kybosh on the dollar correction, while a lower one can promote it to live another day.

Right now on Tuesday morning, the correction is on a tightrope and can easily fall. After all, the US wins on the economic and policy front, hence the evident reluctance to sell it down much more. It’s a scary time.

Tidbit: The Bloomberg “Energy Daily” can be hard to read—too many acronyms—but the charts can be nice. Here is one nobody can understand but see the commentary: “The ‘Europe Perimeter’ — Northwest Europe, Italy and Austria — is forecast to exit the winter with its gas inventories 44% full, according to BNEF.

“This comes as high consumer prices keep a lid on demand, which is estimated to fall 12% short of the 2016-2020 average. The ample storage buffer should help the region absorb shocks from colder weather. The Perimeter is expected to keep attracting strong liquefied natural gas flows, tapping 54% of the global pool of ‘flexible’ supply.” 

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