Outlook:  Today we get retail sales and PPI, with the Empire State thrown in along with business inventories and the NAHB housing data.

Unfortunately, economics news may get drowned out by the squashed stock market rally in regional banks in pre-market trading. The WSJ reports some of the regionals are falling again as “banking fear returns.”  And the European banking sector is in trouble, led by Credit Suisse.

Retail sales are a direct reflection of consumer confidence, regardless of what consumer confidence surveys may say.  In January, sales were almost double the forecast at 3% y/y. The forecast this time is for a retreat by 0.3%, although Trading Economics has -0.2%. PPI may get more attention, anyway. In Jan, PPI rose a hefty 0.7% m/m. This time the consensus forecast is for 0.3%, although Trading Economics expects 0.4%--i.e., no reprieve. We can easily get anomalies and divergences between monthly and year-over-year, too, as in payrolls.

The problem with CPI yesterday was the core at 0.5% m/m when a dip to 0.4% was forecast, and 5.5% y/y. The problem is figuring out how the Fed looks at the numbers, especially when it supposedly cares only about the PCE version anyway, and we don’t get that until March 30. 

As the week progresses, so does our understanding of the bank crisis that yesterday cast fresh doubt on getting any rate hike at all next week. Only the experts have realized from the beginning that this crisis is not the same as the 2008-09 crisis. Different side of the balance sheet, for one thing. If the regional bank stocks can recover and stay recovered, the crisis can provisionally be considered over.

In practice, it has ended—unless another bank or two fails. The early retreat in regional bank stock prices so far today can set off new alarm bells. And unfortunately, a lot of people want the crisis to persist—to make some political point, to make some more money shorting stuff, to have something juicy to write about, and a dozen other reasons.

But a balanced view holds that the critics of dialing back Frank-Dodd are right, even the annoyingly self-righteous Elizabeth Warren. We still need to fix that, or at least fund better oversight and regulation. But the tip of the spear—outright expropriation of banks by the FDIC—is most likely over. Let’s move on.

Moving on entails re-focusing back again on the top problem in the US today, inflation. Everybody has a different view. Here we show the Wolf Street focus—services ex-energy, up 7.3% It’s the highest increase since 1982 and the third month in a row above 7%. It counts because “services is where inflation is now raging and entrenched. Nearly two-thirds of consumer spending goes into services.” The table from Wolf Street is plenty scary, too.

The report goes deeper into the weeds, but we choose this portion because it makes the point, and makes it well, that inflation is not close to being conquered, whatever the minor year-over-year improvement. 

fxsoriginal

Bottom line, inflation is not going quietly into the night. It’s sticky and persistent. See the chart from the St. Louis Fed—6.59% in Feb. And that’s ex food (up 10%) and energy (down but not reliably so). While the Fed funds futures gang is busy churning the outlook for the Fed next week, it’s seemingly heeding only the stock prices in the banking sectors and paying no attention whatever to the true motive and mandate of the Fed—taming inflation. At least one economist has mused that the payrolls and inflation data is so bad that under other circumstances, we would indeed be looking at 50 bp.

Forecast: While anyone would be forced to agree that a renewal of the banking crisis may well stay the Fed’s hand, depending on how severe and widespread it is, the base case should be to expect a 25 bp hike, exactly as signaled. The Fed has to tap-dance between the inflation mandate and the financial stability mandate while keeping an eye on its reputation. We’d say that any enterprise, including banks, that fails because of another 25 bp hike is a nail in the coffin was in the coffin already.

The problem is whether Mr. Powell says or even hints there is a pause after that, as in Australia and Canada. That’s going to be one hell of a press conference! Even if he doesn’t say it or hint at it, the market can decide that’s what’s happening anyway. This is what we expect, and it implies resumption of the dollar rout. 

Not helpful to the overall outlook is the new damage to the European banking system that puts the ECB in the same bind as the Fed. Up to now, the expectation has been fairly solid that the ECB will hike tomorrow by 50 bp, as long signaled. Reuters reports talk of a retreat was squelched when “… a source close to the ECB's rate-setting Governing Council said there was no fundamental change in the outlook, so ditching a widely repeated commitment for a 50 basis point rate increase on Thursday would damage credibility.”

“Money markets were pricing in an 85% chance of the ECB raising its deposit rate by 50 basis points to 3.0% on Thursday, with some banks including Deutsche Bank expecting a smaller or no increase. Investors have sharply cut their bets on further rate rises since the SVB collapse, with the deposit rate now seen peaking at 3.65% in the autumn, compared with an outlook last week of more than 4%.”

For the longer-term outlook, we are sticking to the narrative that with the Fed’s terminal rate at 5.1%++ and the ECB’s at 4% or under, the dollar “should” benefit. Just don’;t ask for when. At some point we have to hear talk of the real rate, too. With US inflation possibly going down to 4.5%, the 5.1%++ will make the US return real, while Europe has a higher starting point (10% at the latest reading) and will have a negative real return. Note that neither bank has a prayer of getting to the target 2% by year-end.


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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This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.

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