The Global Markets Weekly – 5/20/16

Posted May 23, 2016 by rvillareal

Fed to Market: Listen or Else

What a difference a week makes.  A combination of stronger retail sales, upbeat consumer confidence signs, some acceleration in the CPI inflation data, hawkish FOMC minutes, and a persistent rumble of warnings from Fed policymakers have investors rethinking their expectations of a Fed rate hike in June.  The implied probability of a June move which might have been less than 10% before the retail sales data has risen to close to 30% currently.

Since Fed chairman Yellen advocated a “cautious” approach in March, financial conditions have improved, the dollar has lost some bounce, and commodity prices have firmed – all things the Fed has been looking for before they take the next step.

In improvement in the recent indicators has been reflected in various forecasts of Q2 GDP growth, including various nowcast forecasts from the Fed and elsewhere.  Best guesses of GDP growth seem to be around 2.5%, a welcome and noticeable rebound from the lousy 1% pace of the last six to nine months.

While not “good” by historical standards, a 2% plus pace may be “good enough,” as the Fed has seemingly lowered the bar on how high GDP growth has to be, as long as the labor market appears healthy and inflation appears moving towards its 2% target.  The Fed first hiked rates when current quarter GDP growth was well below 2% and slowing down.  Moreover, recent statements would not be so hawkish if the current 2.5% average forecast of Q2 growth was not acceptable.

Still, the FOMC remains divided and a lot can happen in the next month.  Further good news on the economy may boost dollar strength in expectation of another Fed hike and replay the turmoil that erupted earlier this year.  International conditions may also prove troublesome.  For example,  the Brexit vote outcome  of June 23 will not be known by the Fed when they meet, something they flagged at the April meeting.

All this suggests the FOMC might want to punt and go live at the July meeting, even though the Fed does not have a press conference scheduled for that meeting.  The Fed is doing itself no favors by not having a press conference at every meeting, which would then make all meetings “equal” in the minds of investors.

• S.: The potential highlight this week may happen Friday, if Fed chairman Yellen uses a college honor ceremony to speak about current economic conditions.  Otherwise, investors will have to content with comments by lesser Fed officials, including long-time maverick Bullard (Mon/Th).  The data calendar will feature steady home sales (Tu), a modest bounce in a weak trend in durable goods orders (Th), and a confirmation of the early May rebound in consumer sentiment, and small upward revision in low Q1 GDP growth (Fri)
• Eurozone: Against the backdrop of what have been better-than-expected real activity data in the first part of the year, the array of survey data, due this week, will offer clues as to the extent this more reassuring backdrop has continued into the current quarter.  Consumer Confidence data (Mon) should remain very much above-par. Moreover, and more likely than not, still-solid PMI readings are also likely to continue with the May updates due on Friday.
• UK: The GDP update on Thursday will reveal the first glimpse of the spending break-down in Q1.  This is likely to show domestic demand strength, this coming alongside continued strength in imports. Much of the domestic strength is consumer-led, reflecting the continued unbalanced growth backdrop.
• Japan: A disappointing CPI release (Fri) will increase the pressure on the BOJ to do someone.  DE continues to look for aggressive stimulus by the central bank later this year.
• China: The calendar is quiet, with no major data releases.  May official and private PMIs will be released on next Wednesday, June 1. Currently, DE sees the official gauge will show stabilization (-0.1 to 50.0) while the private measure running below the threshold value for the fifth consecutive month (unchg at 49.4.

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