Growth will be slower than many have likely priced in

Outlook: The Beige Book said about what everyone expected but emphasis ended up falling on the idea that growth will be slower than many had likely priced in. Big woo. Vice Chair Brainerd said the Fed is “in this for as long as it takes to get inflation down.” It will take “several months” of falling inflation data to change the trajectory. Translation: 75 bp. She also criticized rising corporate profit margins (translation: consumer price gouging). And rates will be punishing for some time. Cleveland Fed Mester added that growth will be well below 2% for the next year or two. Also, Fed funds will get above 4% by early 2023 and don’t expect any easing next year.

All the same, Brainerd mentioned the “risk of over-tightening” and in Canada, after yesterday’s expected 75 bp hike, the next move is expected to be tamer at 50 bp. Rate hounds are waiting to pounce on new central bank economic forecasts.

The Atlanta Fed’s GDPNow model delivered only 1.4% for Q3, from 1.6% last week. This is due to smallish declines in growth in consumption, investment and government spending (although exports are contributing more). The Atlanta Fed number is now about even with the Blue Chip forecast.

Today is going to be frazzled with nerves–too much is going on. The ECB meets, Fed chair Powell gives a speech (along with Chicago Fed Evans and Minneapolis Fed Kashkari). The EU energy ministers nail down their emergency intervention plans for the energy market. UK PM Truss unveiled the plan for energy costs in the UK (whatever it does to the bond market), still to be pored over. And in the US we are getting a hurricane.

The ECB rate decision is topmost, and with a background of a fresh Oxford Economics forecast of zero growth next year (from 0.9%) and inflation moderating to 4.3%. Yesterday Goldman succumbed to consensus and forecast the 75 (up from 50). We await the economic forecasts. A key factor will be whether the Europeans can really overcome Russia cutting off energy supplies. So far the outlook is not as bad as it could have been.

We suspect dollar strength will resume–nothing much has actually changed in the underlying fundamentals. Europe faces recession, even if it’s going to be less-bad than sometimes thought. The UK faces huge new public deficit spending. Japan is still committed to the yield cap. China is still shooting itself in the foot with zero Covid. The dollar is the safe-haven. (It would actually help if we can put at least some of the corrupt politicians and their cronies in jail.)

Tidbit: A Twitterer recently posted a photo of a Russian artillery shell in Ukraine with the date 1964 clearly inscribed. Russia is said to be buying armaments from North Korea because it has run out of its own supplies. The Tweeter writes “Once I run out of North Korean ammo my soldiers will work in pairs. One will throw rocks & other will shout ‘BANG’.”

This is parallel to the joke during the Russian military assistance to Egypt during the 6-Day War in 1967. An Israeli yells “Ivan,” the Russian pokes his head above the sandbag, and the Israeli shoots him. Joking aside, Putin’s lack of material capability and management skill spells defeat for Russia, or should.

Meanwhile, the US has been sending its GPS-tracking Excalibur artillery shell to Ukraine at a cost so far of $92 million. Reuters reports “the satellite-guided weapon can hit within seven feet (two meters) of its target.”

Putin says the sanctions are not hurting Russia one bit and he can easily cut off all energy to Europe, including oil and coal. The West is trying to “dictate” to Russia but far from being an isolated pariah, Russia has Asian friends. One puzzling thing: the oligarchs are dying in droves, at least eight or nine since Russia invaded Ukraine. If the oligarchs are distanced from Putin and lack influence, as even former US ambassador McFaul says, why are so many dead and so many reportedly by suicide?

Tidbit 2: In California, the temperature hit 116 degrees F. in Sacramento on Tuesday, the highest on record. Bloomberg reported yesterday that the utility company had warned 525,000 households and businesses they may lose power after electricity use surged to an all-time high on Tuesday. PG&E issued emergency alerts direct to cell phones requesting power conservation, and it worked–grid data show that demand plunged in response.”

Two things: words are powerful things. “Blackout” inspired action. Second, not to go overboard, but “united we stand.”

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