It was just yesterday when Richmond Fed chief and consummate hawk Jeffrey Lacker told The Washington Post that in his view, the FOMC needs to “catch up” after falling behind the curve (no bond market pun intended) on policy normalization.
Whatever impetus there was for a March hike promptly disappeared after stocks got off to a rocky start in 2016 and after oil plunged into the 20s. Had the FOMC hiked, they may well have catapulted the dollar higher and exacerbated the forces pressing risk assets lower.
The problem of course is that it’s becoming increasingly difficult for the Fed to explain their hesitation without simply admitting that this is no longer about US economic data. Sure, the April NFP print was a disappointment, Q1 GDP was abysmal, and inflation certainly hasn’t exploded higher despite trillions in asset purchases. That said, it does seem clear at this point that the whole “cleanest dirty shirt” analogy does indeed apply despite the fact that it’ become a horrible market cliche. That is, things are better in the US than in Europe or Japan. There’s almost no question about it.
And so, going forward, the Fed will be hard pressed to explain away any relative dovishness. On the flip side, the ECB and the BoJ will have a difficult time standing pat. To be sure, Mario Draghi and Haruhiko Kuroda don’t have much in the way of counter cyclical breathing room. But they’ll have to figure out something or else simply throw in the Keynesian towel. The current arrangement wherein Europe and Japan tolerate yen and euro strength at the expense of igniting inflation and getting a leg up in the global currency wars in order to suppress the dollar and thereby keep risk afloat isn’t sustainable.
On Tuesday, we got still more evidence to support the contention that the US economy is prepared for tighter monetary policy when the CPI printed at 0.4% M/M in April, the hottest print since February 2013. Core CPI - stripping out food and energy (because who needs those things) - rose 2.1% Y/Y. As WSJ noted earlier, that’s the “fifth consecutive month of annual growth above 2%—the longest such streak in four years.”
(Chart: Barclays)
Here’s BofAML’s take:
“The April CPI report was in line with expectations, with headline up 0.4% mom and core CPI up 0.2% mom. The gains in core CPI were driven by OER (Owners’ Equivalent Rent), which rose by 0.30% mom. This is the fastest pace of OER since June 2015. Rent of primary residence rose by 0.35% mom. Solid gains were also seen in the volatile airfare (+1.1% mom) category.”
And here’s Credit Suisse:
“Overall, this report is an encouraging sign that US inflation is gradually picking up towards the Fed’s target 2.0%. The extremely rapid acceleration in the beginning of the year was unlikely to be sustained, but growth over the past few months is still consistent with rising inflation. We maintain our call that the next Fed rate move will most likely be a hike in Q3, probably at the September FOMC meeting. There is still one PCE-inflation report and another set of employment data before the June meeting, but it would take very strong positive surprises for the data between now and then to create a sense of urgency around hiking.”
While it may be true that the data would need to come in extremely hot to warrant a June hike, two Fed speakers struck a somewhat hawkish tone on Tuesday. San Francisco Fed chief John Williams and Atlanta Fed President Dennis Lockhart both weighed in today at an event hosted by Politico in Washington. “Currently my assumption is two, possibly three [rate hikes] are possible” Lockhart said, before adding that it “depends on how the economy evolves.”
Williams echoed that sentiment: “Gradual means two to three rate increases this year,” he said.
Lockhart and Williams went on to send still more hawkish signals. Here are some key soundbites:
Lockhart: “The markets are certainly more pessimistic than I am.”
Williams: “My view is June is a live meeting” and “six weeks later we meet again.”
Williams: “The incoming data have actually been quite good and reassuring.”
Lockhart: “Both wages and prices are moving in the direction of our objective.”
Needless to say, that’s not exactly what the market wanted to hear. Hence today’s sell-off.
Williams went on to note that “if [the US] stays on the good path, then if we were to raise two or three times this year it wouldn’t be that much of a surprise.” The risks, Williams said, are concentrated in the global, not the domestic, economy.
Is June really a “live” meeting? No, probably not. But what today’s market action tells us is that good news is still bad news in so much as ostensibly positive economic data drives hawkish sentiment among policy makers.
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