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SocGen: The Fed Is Wrong, “The Growth Spurt Is Now Behind Us”

Courtesy of ZeroHedge. View original post here.

Yesterday, Fed Chair Jerome Powell threw markets for a loop when he suggested that the US economy is on the verge of overheating, and that it was performing better than it did during the December FOMC meeting. This prompted a surge in the dollar, and a slump in both Treasurys and stocks.

The narrative immediately shifted: UBS’ chief economist Paul Donovan commented that “Former US Federal Reserve Chair Yellen suggested that there were few systemic risks in the US financial system, but that the current fiscal position was troubling. This is a rather consensus view, but the former Fed chair presumably had access to better information than the consensus. Current Federal Reserve Chair Powell indicated rates should go up” and added that “the broad picture is of a US economy performing at or above trend, justifying four rate hikes this year.”

Others quickly chimed in (via Bloomberg):

  • Evercore ISI vice chairman (and former New York Fed official) Krishna Guha: “Had thought the message in March would be 3+3 (three in 2018, three in 2019) with the Committee moving to 4+3 in June once the inflation data had firmed further. Following Powell’s remarks there seems to be a good chance that many or even most FOMC participants will go to 4+3 in March”
  • JPMorgan Chief U.S. Economist Michael Feroli (who remains in the four-rate-hike camp for both 2018 and 2019): “We  now think the odds are tilted slightly in favor of the median participant revising up their outlook to look for four hikes this year and another three hikes next year”
  • Goldman Chief Economist Jan Hatzius: “We agree with the market’s hawkish assessment of Powell’s comments. At this point we see roughly even odds that the median dot will show 3 hikes (2.125%) or 4 hikes (2.375%) for 2018 in March, and we think the median dot for 2019 is likely to move up from 2.7% to 2.875%”

And yet, could Tuesday’s Powell “hawk shock” and the resultant market reaction simply be another instance of driving forward by looking in the rear view mirror. After all, is the economy really that much stronger than it was in December as Powell claimed? One look at the sharp drop in Q1 GDP nowcasts from the Atlanta Fed, which yesterday saw its initial euphoria Q1 GDP forecast slashed by more than 50% from 5.4% just a few weeks ago to 2.6%, suggests that the US economy is actually slowing.

Economic data confirms this: global economic surprise indices, and especially in the EU and US, have taken a clear turn lower.

And then there was SocGen’s FX strategist Kit Juckes who took the contrarian view to what is rapidly emerging as a “4 hike” consensus, and writes that “it would take a big surprise from US ISM data to avoid a second monthly decline in global PMI measures. That, along with falling economic surprise indices, and signs that at a global level inflationary pressures aren’t noticeably building, fuels the view that the growth spurt at the end of 2017 is now behind us.”

If so, it would have significant consequences for risk assets (higher) and for yields (lower). Here is the key excerpt from his morning note:

The new Fed Chairman sounded upbeat, pushing up expectations of four rate hikes this year. 2-year Note yields reached a new high for this cycle, the dollar is stronger and equity indices are lower across the board.

As Chinese PMI data disappoint, it would take a big surprise from US ISM data to avoid a second monthly decline in global PMI measures. That, along with falling economic surprise indices, and signs that at a global level inflationary pressures aren’t noticeably building, fuels the view that the growth spurt at the end of 2017 is now behind us. The case for fading the long-end Treasury sell-off would seem to be growing.

That would be more important from an FX perspective, of course, if we hadn’t just seen the collapse of yield/currency correlations. Still, there’s a reasonable chance that we now seen a peak in the T-Note/Bund yield spread, which hasn’t quite breached the late 2016 cyclical peaks. EUR/USD 1.21 is the key support level for EUR/USD at the moment and 1.23 is the barrier to further gains, so the range from which a break-out might come is getting narrow. Hopefully that promises more volatility once we do get a break. I think we break up, not down, but time will tell.

Looking at some key correlations, Juckes then notes that the yield differential correlation between the EURUSD and 10Y spreads may be broken but yield spread may turn now….

A few more disappointing data points and we will know if he is right, and if Powell will be regretting his bullish outlook in just a few weeks. With futures in the green, algos seems to already be “pricing in” that it is only a matter of time before bad news is good news (for the S&P at least) all over again.


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