Outlook: The US economy grew 1.6% q/q in Q1 while the eurozone economy contracted 1.8%. The FT names the eurozone contraction a “double-dip recession” and notes without sarcasm that the ECB forecast for the year is +4% and a return to the pre-pandemic level in 2022 with 4.1%. Less politely, that forecast is probably pie-in-the-sky while the Atlanta Fed and Goldman forecasts for the US at 8% may very well come true. 

Do we even need to look at inflation? Well, as WolfStreet puts it, “The BEA’s broadest inflation measure, the price index that roughly parallels the inflation adjustment to GDP (the ‘price index for gross domestic purchases’), jumped by 3.8% annual rate in Q1, more than double the rate of 1.7% in Q4.

“The BEA’s narrower PCE (‘personal consumption expenditure’) price index jumped by 3.5% annual rate in Q1.

“And the BEA’s price index that has become the Fed’s measure for inflation, ‘core PCE’ (PCE without food and energy) rose by 2.3% annual rate, tracking above the Fed’s former target of 2.0%. “Former target” because now the Fed is looking for inflation above 2%.”

Note that some economists get annoyed at the assertion that the Fed looks at core PCE when the actual document at the Fed site specifically names PCE, not core PCE, but never mind.

We get personal income and spending today, along with the Chicago PMI, consumer sentiment, Baker-Hughes, and some other stuff, including more earnings, but the personal income is going to be the driver. Because the government handed out stimulus checks and jobs were recovered, both income and spending should be very nice, indeed, with incomes up as much as 20% and spending, over 4% (Bloomberg). More importantly, the data highlights that while Europe has a far wider and deeper safety net, it has spent a lot less than the US.

Don’t forget that comment from Saxo Bank--“At this point, it’s very clear that the ECB doesn’t have the situation of European sovereign yields under control. I would expect, depending on the severity of the selloff, that we could expect an increase of purchases.”

Central banks do not, on the whole, “control” sovereign yields. They can do that only indirectly with short-term policy and of course, QE, but even with QE, they can’t be said to “control” the market. But let’s go with it for a minute. With the eurozone economy faltering into a double-dip recession and far behind on vaccinations, hinting of more lockdowns, doesn’t that imply a boost to QE and therefore a more dovish stance? In contrast, the bond boys in the US are agitating for a more hawkish stance, or at least “talking about talking about” some advance notice of an announcement that will schedule tapering. That makes the Big Picture outlook one of divergence in central bank policy for the first time in a long time.

The retreat/correction/pullback in the euro this morning may well have this fundamental component as well as the classic re-positioning from the overbought condition. 

To add fuel to the fire, many analysts are sticking to their guns that the Fed should bring forward talk of tapering and not wait until December to mention it. Remember that Morgan Stanley thinks the Fed will relent as early as the June meeting, even if “relent” means talking about talking about. Columnist and former bond guru El-Erian is one of the critics, saying the Fed’s reluctance to begin tapering will nurture inflation and financial instability. Not starting now at the first glimpse of roaring data mean it will be that much harder to apply the brakes later when the data make it inevitable.

Does the Fed pay attention? Of course. Powell had to stick to his story this week, but if the pressure keeps up, and yields bear out the pressure (with a return to over the 52-week high of 1.77%), the June meeting can indeed by the start of something. So we have to ask whether the conventional risk-on/risk-off model still applies, or the relative growth/relative yield from the economics textbook comes back to rule the day. You can’t have it both ways. This question is why we see choppy and divergent FX moves, with nothing to do with month-end. (Be careful to watch Canadian data this morning for this reason.)


This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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