UPCOMING EVENTS:
Wednesday: RBNZ Policy Announcement, BoC Policy Announcement, US CPI.
Friday: US University of Michigan Sentiment Survey.
The market focus this week will be entirely on the US CPI data on Wednesday. At the moment the market expects a 75 bps hike at the July FOMC meeting with some little pricing of 100 bps. A surprisingly hot CPI will certainly cause pain in the markets and raise the pricing on the more aggressive 100 bps hike. We may even see a positioning into the report. But let’s see first the other notable events coming this week…
On Wednesday the RBNZ is expected to hike the cash rate by 50 bps bringing it to 2.50%. The RBNZ already stated that the monetary conditions will need to act as a constraint on demand and the risk of doing too little too late is worse than too much too soon (something the Fed is pursuing as well). Finally, the Bank of Canada is expected to hike rates by 75 bps bringing the rate to 2.25% after the hot CPI data cemented the more aggressive path.
The US CPI data is expected to rise 8.7% for the Y/Y figure and 1.0% for the M/M reading due to high energy and food prices. The Core measure is expected to cool a bit with 5.7% Y/Y reading and 0.5% for the M/M one. As we saw in the previous month, the Fed is responding aggressively to any upside surprise in inflation data, and this means that another hot inflation report will put even more pressure on them and kick a debate between 75 and 100 bps at the next meeting and no longer the 50/75 as we’ve been seeing till now. The US Dollar would certainly appreciate even more in case of an upside surprise.
Finally on Friday we will get the University of Michigan Consumer Sentiment Survey. The report is expected to show another dip in consumer sentiment to 49.0 making a new record low for the series. Such an awful consumer sentiment is of course really bad for the economy as a whole. The market will focus especially on the long run inflation expectations as an uptick in the previous report acted as an extra pressure for the Fed to go for the more aggressive 75 bps hike as Fed Chair Powell stated himself.
In the bigger picture, we are clearly in a recessionary cycle coupled this time with a high inflation that forces the Fed to focus solely on tightening monetary conditions and disregard economic growth. As of now, we have an equities bear market, an inverted yield curve, big losses in commodities sensitive to global growth like copper, a very strong US Dollar, high inflation, an aggressive tightening by the Fed, consumer sentiment at record low and leading components in the PMIs in contractionary territory. If this doesn’t scream to you that we’re in a recession or heading into one, then you must be a very optimistic person.
If we weren’t coming off of such a high inflation rate but say a 3% one, then we most probably would have had the Fed already cutting interest rates. But not this time. Every cycle is the same except for what’s different. Keep in mind the bigger picture and avoid being caught in the noise.
This article was written by Giuseppe Dellamotta.