Attack the Week (ATW)
Monday Thoughts
— by Macro D
From my point of view, trying to put your macro bets on the table means trying to put yourself in other people's shoes. Today, I try to put myself in Powell's shoes. I don't have a degree in Politics or Law but the current playing field and role of Powell is too fascinating to resist.
I'll start with a simple question: is Jay worried, or is he not worried about this blessed/damned inflation?.
Answer: If Powell was afraid of inflation, then it would necessarily have to raise rates or at least leave them where they are today until inflation decides to firmly set foot in the 2% area (the famous target).
Why should Powell be worried, though?
Because US economic growth delivered an annualized 1.6% in the first three months of the year while he and other central bankers had relied on growth averaging around 2%.
What did Powell see immediately after the release of these data?
Powell saw bond yields rising (freely) across the curve.
At this point, what did Powell think?
Powell must have thought: “Now the market has higher inflation expectations.”
Powell remained looking at the screens and saw that:
- The yield on 10-year Treasury bonds went above 4.7%.
- the 2-year yield exceeded 5%.
- the 30-year yield broke through 4.8%.
I think at this point, Powell wiped his forehead with a black silk handkerchief and said in a low voice (exclusively to himself).
“What if I were the President of the world's most important central bank facing a slowing economy that goes hand in hand with rising inflation?”
Powell must have come out of his office; he probably started walking along the corridor, head bowed and muzzled long, and brooded... “I already imagined that inflation was raising its head again, but this growth that isn't moving, this consumer spending that...”
Powell probably stopped in the middle of the corridor.
Yes, I have to admit that. Powell's shoes are not easy to wear.
Consumer spending represents approximately 65%/75% of economic activity and is the figure that most of all predicts a word that no central banker likes to pronounce: RECESSION.
If consumer spending drops, the hash is done. At this point, companies are making increasingly smaller profits and consequently cutting jobs. What happens to consumers?
They find themselves having to face higher prices.
In short, if consumer spending continues to slow down, things will get bad for Jay and the gang.
Could he raise rates? Higher rates would mean higher financing costs, and this hypothesis would risk leading the American nation towards a recession quicker.
At this point, Powell regained his clarity and said to himself: Well, the personal consumption expenditure (PCE) price index, which is my favorite measure of inflation, reached 2.5% in the 12 months up to February, therefore it exceeded the 2% target set”.
Powell took a deep breath, then "Ah, yes, on the one hand, the increase in prices weighs like a boulder on the purchasing power of families, but on the other hand, low inflation would slow down economic growth”.
What do I think?
If Powell were truly ready to speak out, he would use the release of US GDP data for the first quarter of 2024 as justification for an immediate easing of monetary policy.
Now, I don't think he will. Consumer demand does not allow this path to be taken. Therefore, I believe that Powell is forced to postpone the decline in interest rates to a more favourable near future.
Let’s now look at what the week has in store for us and what the most important charts should be for you to consider. The FOMC on Wednesday is this week’s obvious main event, though US JOLTS and Q1 ECI are key risks beforehand, while NFP is critically important as we close out the week.
Earnings from US and European companies are released over the week. Amazon and Apple are the last of the Mag 7.
Let’s go!