Today the Bank of England is expected to hike by 25 bp after the Swiss National Bank hiked by the expected 50 bp and also announced the banking crisis over. These hikes were needed not only for inflation but to signal the banking crisis has ended.

The incoming data today includes the usual Thursday weekly jobless claims, new home sales, the Kansas City and Chicago Fed indices, and the Q4 current account. The Treasury will auction 10-year TIPS. Now if only the TIPS website were even remotely usable.

The top takeaway from yesterday’s hike and speech is that the market doesn’t believe it. Powell said there is a possibility that “some additional firming may be necessary,” a phrase that replaces references to “ongoing increases.” Nevertheless, the market continues to see a cut this year. Last evening some 62% expected that. By 7:30 this morning, those expecting at least one cut is 78.9% and the probability of rates remaining the same at the Dec ’23 FOMC is a mere 3.4%. “Dovish hike,” indeed.

The second takeaway is that the market expects the looming credit crunch arising from banking sector woes to be severe, and that’s even without another crisis. The evil outcomes—recession, bank troubles—are inherently deflationary. But as with inflation going up, it has to lag going down, too. Reuters has a fascinating chart showing that the Fed funds rates at year-end has met expected inflation at year-end, and will by May start surpassing it. Both are forecasts, which makes it doubly uncertain, but what a chart!

Bloomberg has an article late last night saying “A recession is certain and so are rate cuts this year. That’s the message from the bond market metric Federal Reserve Chairman Jerome Powell highlighted a year ago as the best guide to tip-off economic troubles in the US.

“The expected three-month T-bill rate in 18 months’ time dropped to 134 basis points under the current rate. That’s below the previous record nadir it hit in January 2001 — about two months before the US economy fell into recession.”

This comes from Powell’s statement a year ago (March 21, 2022) that “…  there’s good research by staff in the Federal Reserve system that really says to look at the short — the first 18 months — of the yield curve. That’s really what has 100% of the explanatory power of the yield curve. It makes sense. Because if it’s inverted, that means the Fed’s going to cut, which means the economy is weak.”

“Swaps traders see about a 50% chance that the Fed won’t raise rates again, after it hiked by 4.75 percentage points starting with the March 16, 2022, decision to raise by a quarter of a point.” The recession may not begin until Q4, but expectations as shown in the swaps market have the Fed cutting as early as July.

We still have to get a grip on what the Fed said and projected. The Fed projections are lengthy, boring and, consisting of a range of forecasts, not terribly useful. 

We get a discouraging projection of a lousy 0.4-1.0% for GDP for the year, with 2024 going to 1.2% (from 1.6% last December). Unemployment will fall to 4.5% (range 4.4-4.7%). PCE inflation will be 3.3%, with core at 3.6%. It will take to 2025 for inflation to return to the 2% Fed target.

The dot-plot for year-end Fed funds is unreadable so here is a simplified version with the number of voters for this year alone:

1          5.875%

0          5.750%

3          5.625%

0          5.500%

3          5.375%

0          5.25%

10       5.125%

0          5.000%

1          4.875%

This doesn’t look like any distribution of forecasts we have ever seen.

We also think the economic data projections are unduly gloomy and do not bear out repetitions of confidence in the stability and resilience of the economy. It’s perfectly true that so much tightening plus a banking crisis is going to cut deeply into bank lending, but as we noted yesterday, the banks can’t treat themselves to bonuses and “conferences” in the Caribbean without earnings, so we have more faith in American greed than the buttoned-down Fed. One potential crisis starting to get press is commercial real estate, especially offices, following malls down the road to the poorhouse.

Net-net, this was one of the least successful of the Powell press conferences and it will take some time to air out the room. Next up is PCE inflation at month-end. We have trimmed means and sticky prices and comparisons of CPI vs. PCE, but here’s a juicy thought—what if inflation falls by more than currently expected? 

Here we go: PCE inflation was 5.3% in Dec but higher at 5.4% in Jan, with a trimmed mean at 4.63%. The Cleveland Fed Nowcast sees Feb PCE at 5.10% with March delivering a lovely 4.4%.  Granted, core doesn’t improve, but never mind. Note that 4.4% is well on the way to the Fed’s projection of 3.3% and to the extent inflation is trended, reaching it sooner than the Fed thinks.

The point is not that the Fed’s forecasting is lousy, but rather that all forecasting is lousy by definition and when the Fed is this gloomy, it encourages more folks to move to the recession camp. And perhaps Fed sees such a drastic curtailing of bank credit that they are justified. It will be about one day before somebody suggests reducing QT as an offset.

And, heaven forbid, what if we get more bank runs or other problems in the banking sector? With electronic banking, the public and the financial experts alike can whisk their dough right out of any bank. The problem, of course, is where to put it—there is no electronic mattress. With confidence in both banks and the government fairly low, bonds are not a good choice and for the vast majority of the public, neither is the stock market. That leaves gold, real estate, and crypto. Oh, dear. All places where unreliable pricing and scamsters thrive.

There is even a conspiracy theory that the government targeted Silicon Valley and Signature Banks because of their association with crypto, which would be unbelievably reckless. Factually, the government has been unable to keep up with crypto, whether the SEC, Treasury or any other agency. That’s what you get in a free market in which authorities issue “money” and regulate banks by law but can’t wrap their heads around anything not issued by the government as “money” and therefore not to be regulated.

Forecast: The actual data, the forecasts from various quarters and the Fed’s projections are all at odds with one another, a veritable minestrone soup of uncertainty. We get the Atlanta Fed GDPNow tomorrow and the PCE at month-end, but it’s not clear these will help. The uncertainty alone means higher risk and contrary to tradition, the dollar is not being seen as a safe-haven. The FX market seems to prefer risk-on venues like the emerging markets, including even the Chinese yuan. The good aspect of extreme anxiety is that it is too exhausting to last very long. This results in re-positioning and suggests dollar relief, if only as a correction.

source: fx street