Forget data – Today Fed chief Powell speaks

Outlook: Forget data–today Fed chief Powell speaks and is widely expected to seal the fate of the next hike at 50 bp instead of the standard 25 bp. We have to ask where we stand in the “buy the rumor, sell the fact” cycle. If everyone already expects the 50 bp, and they should, does that feed a softening of the bond selloff (which may have gone overboard)?

Bloomberg notes that the Beige Book yesterday uses the word “shortages” more than 50 times for the second report in row. Growth is moderate, prices are still rising and geopolitical developments still create uncertainty and cloud the outlook.

Aside from the roiling CAD, the big mover is the dollar/yen, Japan’s FinMin Suzuki is meeting TreasSec Yellen today at G20. Yesterday Suzuki said “We must take appropriate action [on the yen] while closely communicating with financial authorities of the United States and others based on G-7 and other agreements.”

Well, no. We can’t see Yellen agreeing to intervention, which is the hidden message when the cause of the yen weakness is at the MoF’s choice–unless we think the MoF and the Bank of Japan are at odds, which makes US or G7 intervention even more unlikely. As we warned yesterday, the correction is an organic thing and should not be considered a function of expectations of an intervention that is improbable in the extreme.

Blomberg also summarizes the shift in the eurozone yield situation: “Traders are betting the European Central Bank will raise rates above zero this year for the first time since 2012, after a string of hawkish comments from policymakers. Money markets are pricing 75 basis points of interest-rate hikes by the ECB’s December decision, according to swap contracts linked to the euro short-term rate. The ECB should be able to phase out asset purchases in July to pave the way for an interest-rate increase as early as that month, according to Vice President Luis de Guindos.”

Most of this is wishful thinking by hawks, although the part about ending assets purchases in July seems moored in reality. A hike at the same meeting is not likely, though. It’s hard to know whether this is Bloomberg bias showing through thin fabric or valuable inside information.

We continue to expect the dollar to recover after traders unload a sufficient amount of them, because nothing developing points to a change in the relative differentials.

Foreign affairs

Russia claims to have captured the city of Mariupol, with thousands trapped inside a steel complex, including resistance fighters.

In Germany, the FT Reports panic is spreading over the possible loss of Russian natural gas to embargo. It gets 55% of its supply from Russia. “The fear is that any sudden gas shut-off could paralyse large parts of the country’s industry. Martin Brudermüller, chief executive of the chemicals group BASF, says it would plunge German business into its ‘worst crisis since the second world war.’”

Yes, indeed. “Energy veterans are at a loss. ‘I’ve seen many disruptions,’ says Leonhard Birnbaum, chief executive of German energy group Eon. ‘I’ve seen the energy transition from zero to, let’s say, full steam. I’ve seen Fukushima . . . I’ve seen turbulent times. But what we are observing right now is . . . unprecedented.’”

The institutes joined together last week to predict an embargo would cause Germany to lose 2.2% of output next year and more than 400,000 jobs. The Kiel Institute says this is a wipeout of 6.5% of GDP.

The FT article says the dependence grew out of East German relations with Russia and helped along by the Merkel government phasing out nuclear after Fukushima. “The German politicians seen as having fostered close ties to Russia are now being pilloried. One is Frank-Walter Steinmeier, a former foreign minister in Merkel’s government who is now Germany’s president. He had planned to visit Kyiv last week but was told by Volodymyr Zelensky’s government that he would be unwelcome – a spectacular snub.”

The government is scrambling to find alternatives and some critics say Germany industry is exaggerating the potential negative effects, and even if dire outcomes fall on some, “ending Russian energy imports would be ‘manageable’ for the German economy. ‘It is a temporary crisis,’ [a professor] says. ’We can protect jobs with short-time work and support companies with capital injections by the government. We have done this before with Covid. Germany has the fiscal capacity to pay for this.’” We like that last part–Germany can pay for this.

Tidbit: The WSJ Daily Shot has this chart on US consumer debt from Deutsche Bank. Debt has fallen mightily and consumers have more cash than debt for the first time in 30 years.

What can this mean? First, maybe consumers were able to cut debt because of the emergency Covid payments from the government–and they will go right back to high debt levels sometime soon. Hmm, maybe, but those payments were last year. Maybe they cut debt because of bone-chilling fear of the future and wanting to be able to fend off bankruptcy if the worst-case were to happen. Note that bankruptcies fell by 24% in calendar 2021. Moreover, business filings fell 33.7%.

Maybe it’s a wealth disparity aberration–middle and high income earners benefited more over the past two years than low earners, and perhaps all that cash just reflects their relative advantage. Well, you can go on speculating but the one sure takeaway is that fear of consumers staying home and counting pennies because of shortages and high inflation is improbable. And the US economy is two-thirds the consumer. Whatever the cause of the trend, it ‘s a good thing, and that’s an economic judgment, not a moral one.

Tidbit 2: Israel is rejiggering its reserve components, taking the euro down from 30% to 20% and the dollar from 66.5% to 61.5%, the spare money going to sterling, yen, the AUD and CAD (3.5% each), and 2% to China. Do not heed stories saying this symbolizes the end of the dollar as the top reserve currency. It’s housekeeping, not a structural change. The big news is the downgrade in the euro, probably because the eurozone is likely to slide into recession next year, not to mention the first land war since WW II.

Tidbit 3: The NYT has a front page story on a Ukrainian stamp selling out–it has a picture of a soldier giving a Russian ship the finger. Now the Postal Ministry will have to run the printing presses again. We had looked for it online and last week eBay had some for sale. It still has some, with prices all over the place. One is an envelope with the stamp for $2999.99. You can still get a t-shirt with the stamp’s image on it. You have to wonder at the gall of a government agency creating this stamp in the first place. Was it a marketing ploy all along to raise attention and money or old-fashioned chutzpah? Did Zelinksy know about it or was it a rogue act? If it was the brainchild of a single person, every ad agency in the West wants his name.

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