As the rest of the world starts copying the Fed, we see more and more forecasts of rate hikes

Outlook: We get retail sales and consumer sentiment today, but watch out–the data is a minefield. Sales can rise on inflated prices alone, and picking out what is a true rise vs. a price-only one is well-nigh impossible. Then there are the exclusions, like gasoline, and in addition, some lingering base affects. Last March we had just got the vaccine and sales were still soft, especially in services. Don’t forget the ex-autos idea. Bottom line, efforts to create a “controlled” number–controlled for special factors–are not convincing and all too subjective.

As the rest of the world starts copying the Fed (although to be fair, some were ahead of the Fed, like New Zealand and Norway), we see more and more forecasts of rate hikes. The latest is the UK, after yesterday’s high inflation readings. Sterling obediently rose, as did the CAD, finally, on actual action.

Gains in other bond yields coupled with a backlash against an overshooting in the YS 10-year was a dollar negative yesterday. The question is whether we get a reality check from the ECB, which is expected to do and say absolutely nothing of use with respect to forward guidance. This looks like they don’t know what to do and are paralyzed by conflicting objectives. Overall, a majority of financial managers expect Europe to get recessionary as the year wears on, according to the BoA/ML survey–with corporate earnings following suit. And yet the euro itself is bouncey. We deduce that it’s the dollar that is soft and not the euro that is firm.

Bloomberg in one of it summaries writes that “Global bonds rallied amid market confidence that central banks are on track to tame inflation.” Bloomberg has splendid headline writers that sell newspapers, so to speak, but is that really true?

Nobody knows how high inflation can go–remember Kiplinger’s 10%–but Fitch just gave us pause. See the chart from the Daily Shot–oil has already peaked at over $110 and the next year should see $90-100. We don’t know the assumptions and reasoning, but Fitch is hardly a bunch of loonies or wishful thinkers–they have to put ratings on companies and countries in this sector. We choose to give Fitch credibility despite the events of 2008.

Meanwhile, the IEA said watch out, the impact of sanctions on Russian oil won’t hit the market until May. It also named falling Chinese demand, the emergency release of strategic reserves and OPEC output increases are all moderating factors that will bring “balance” in Q2. This sounds like utter bilge but we lack hard data to refute. China can buy and stockpile, as it has done before. OPEC refused outright to raise output and some members wouldn’t even take a meeting with Biden. The strategic releases are said to be a drop in the bucket.

Anyway, looking at core producer prices is scary enough. See the chart from Trading Economics. Removing energy and food, the rise is still significant at a record 9.2% y/y (from 8.7% and beating the forecast of 8.4%).

We guess the pullback in US yields is a normal response to having overshot to the upside once the bond boys belatedly got the message that the Fed means business. It’s a blip. Let’s not overthink it. The Fed still leads and the dollar will reflect that.

Foreign Affairs: Ukraine may have taken out of service the lead flagship Russian warship in the Black Sea. This is more symbolic than militarily meaningful but bravo. The US and Ukraine are able to fend off Russian hacker cyberattacks, although the news is spotty. The US is giving even more aid. Finland and Sweden are about to request membership in Nato. As a sign of how screwed up the Republican party has become under Trump, some Republicans say they would oppose those memberships.

Serious Tidbit: JP Morgan CEO Dimon said some serious dirt can hit the economic fan even if it’s not still a remote possibility and so far most metrics are hunky-dory. The bank is setting aside $900 million in reserves against possible loan defaults if the worst happens. The interesting thing is that a year ago, it “freed up the $5.2 billion it had reserved for potential loan losses in the pandemic’s early months.” (WSJ) The implication is that the Russian war/oil price issue is less than 20% as bad as the worst case that could have arisen from the pandemic.

Fun Tidbit: TreasSec Yellen warned China against joining with Russia to form a bipolar financial system. A lot of people thought she was talking about the dollar losing reserve currency status. Some of the foolish commentary is hilarious (but also bothersome because it puts on display the lack of understanding of money, the financial system, what a reserve currency is in the first place, the status of gold in the currency world, etc. As far as we can tell, Yellen was saying China and other fence-sitters (India) need to join the west in shunning Russia and its oil and its currency, or risk retaliation down the road. From us.

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