Is this going to be the week that all hell breaks loose? We have dramatic developments in politics on both sides of the Atlantic.
In the US, it looks like Robert Mueller, the Special Counsel of the investigation into Russian interference in the 2016 United States elections and related matters, may wrap up his two-year investigation and present his results to the US Department of Justice. Then what? That’s what everyone wants to know. Under the special counsel regulations, Mueller must submit a "confidential" report to the attorney general, but the AG isn’t required to pass that on to Congress, or by extension, the public. There’s talk the AG – recently appointed by Trump, the main object of the investigation – may just present “a summary” to Congress. This could be the beginning of the end of the Trump regime – or it could just be the beginning of the next stage in a continuing partisan battle.
Meanwhile, in Britain, Remain supporters and those who want to see another referendum are deserting both the Labour and Conservative Parties and joining the Independent Group. PM May is down to a nine-person majority. If more people abandon the two major parties, the leaders of both will have to start listening to the demands for a second referendum. That’s the only way I can see to avoid a hard Brexit.
PM May is going around Europe trying to drum up support for…for what? Her trip raised all sorts of hopes, but it hasn’t gone that well. "My efforts are oriented in a way that the worst can be avoided,” said European Commission President Juncker. “But I am not very optimistic when it comes to this issue. He summed up the situation nicely when he said, “In the British parliament every time they are voting, there is a majority against something, there is no majority in favor of something." How can May get any concessions from the EU when she doesn’t know what to ask? The EU might make some concessions if it would help May to pass the bill through Parliament, but unless May tells them what will pass, there’s no reason for them to budge.
Here’s a Venn diagram I saw on Twitter last week. Apparently the person who made this did it in July 2016, about a month after the Brexit vote. The person sending it around said “if you had fallen asleep then and just woken up, this would still tell you all you need to know.” I think that’s absolutely right and it explains why I’m bearish on the pound. Notice that there is no place where all three circles overlap. There just isn’t a solution that will satisfy the EU and those who voted Leave and still not crash the UK economy. Since they can’t all agree on anything, agreeing on nothing seems to be the most likely result. That means crashing out with no agreement.
I do hope I’m wrong, and the entire history of the EU is that they can make the necessary compromises at 11:59 PM the night of the deadline, but this time, they may run out of road to kick the can down.
Next week: The Testimony Formerly Known as Humphry Hawkins, US 4Q GDP, EU, Japan & US inflation
In the week ahead, the main feature is likely to be Fed Chair Powell’s semi-annual testimony to the Senate Banking Committee and the House Financial Services Committee – formerly known as the Humphrey-Hawkins Testimony. I wonder though if there’s anything new we can find out. We got a press conference after the 30 January FOMC meeting, we’ve had the minutes from that meeting, we’ve had speeches from any number of FOMC members (including both Powell and Vice Chair Clarida)…is there anything left to learn? Probably we’ll get more thinking on how he and his colleagues view the US economy developing now that the data delayed by the government shutdown is finally coming out.
Also how do they see the global economy going – that appears to be a bigger problem for them than the domestic economy. Growth in world trade started to turn down early last year and now is decelerating sharply. The PMIs suggest that this decline has if anything accelerated in subsequent months. This is a major concern for policy makers around the world, particularly in export-dependent Germany.
In that connection, on Thursday we get the first estimate of US 4Q GDP. Estimates have been marked down sharply after the shock horror chaos of the December retail sales figures, expected to be up 0.1% mom but instead down 1.2% mom, the worst performance since the Global Financial Crisis.
With personal consumption accounting for 68% of US GDP, that’s a big shock.
The market is now going for +2.5% qoq SAAR growth in Q4. This is slightly below trend, but it’s hardly a recession. Nonetheless it’s down sharply from the 4.2% rate of Q2, and the trend is the key point. The NY Fed’s “Nowcasting” forecast is 2.2% and 1.1% for Q1 2019, meaning they don’t think this is the bottom – they expect the economy to keep slowing. The Atlanta Fed’s GDPNow forecast is a much lower 1.4%, which is far below the range of professional forecasters – on Bloomberg, forecasts range between 1.8% and 3.2%. The wide range of forecasts for this indicator could imply a lot of volatility afterwards – some people are likely to be surprised no matter what the figure is.
Furthermore, how does this figure compare with the Fed’s estimates? In December, the Committee projected 2.3% GDP growth for 2019, with a “central tendency” (excluding the three highest and three lowest estimates) of 2.3% - 2.5%. But if Q4 2018 is 2.4% and the economy slows from there, it’s going to be hard to match their forecast. The minutes of the recent FOMC meeting said that only “several” participants “indicated that, if the economy evolved as they expected, they would view it as appropriate to raise the target range for the federal funds rate later this year.” And what if it doesn’t evolve as they expect? No rate hikes.
Elsewhere, we’re going to get inflation estimates from Germany and the Eurozone as a whole; the US; and Japan. All told, data from the three countries are likely to confirm the story that we’ve been hearing from central banks all over the world: inflationary pressures are muted, inflation is not rising as fast as was expected despite tight labor markets, and there’s no need to rush to hike rates.
If we look at the 5yr/5yr inflation swaps, a market forecast of inflation five years from now, US and (oddly enough) Japanese inflation expectations have gone up this year, but EU, UK and Australian inflation expectations have fallen further.
Germany’s CPI comes out on Thursday and the EU-wide CPI the following day, as usual. No forecasts are available at the time of writing, but I don’t think anyone would be surprised to see inflation slowing further. At the January ECB meeting, ECB President Draghi said, “On the basis of current futures prices for oil, headline inflation is likely to decline further over the coming months. Measures of underlying inflation remain generally muted…” Certainly, EU inflation expectations have been trending lower recently, so no one should be surprised if the figures show a slower pace of price increases. Nonetheless, seeing the trend take shape could prove negative for the euro.
For the US, the inflation data will come out on Friday, when the Bureau of Economic Analysis (BEA) releases the December figures for personal income & spending and the January income figures. They’ll release the December personal consumption expenditure (PCE) and core PCE deflator figures at the same time. The headline figure is expected to slow down a bit, as would be expected as oil prices fell 11% and retail gasoline fell 9% during the month, but the core PCE deflator – the Fed’s preferred inflation gauge – is forecast to stay at 1.9%, which is pretty much right on their 2% inflation target. At the moment that doesn’t necessarily imply any further tightening though, so it may prove only neutral for the dollar.
Finally, the Tokyo CPI comes out Friday morning Japan time. As I’ve mentioned before, Japan’s inflation hasn’t hit the Bank of Japan’s target for some 20 years, and I don’t see why that should change any time soon. In fact, this indicator is forecast to show virtually no change in inflation. Boring, boring, boring.
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