The risk of recession is real but not imminent

Outlook: We have to wait for Friday to get any market mover days–Germany IFO, UK retail sales, Japanese CPI.

We have very little fresh US data this week to impress anyone one way or the other, leaving room for Feds to try to dominate the narratives.

This time it was Cleveland Fed Mester, who told us on TV yesterday that it will take a couple of years for inflation to return to 2%, the risk if recession is real but not imminent, and demand is easier to curb than getting the supply side back in line.

This is so obvious and common-sense and drama-free that of course nobody wants to listen. More interesting is Fed Gov Waller backing another 75 bp in July if the data doesn’t behave itself.

You can’t extrapolate from a sample of one but note that commodity prices are down pretty much across the board–see the chart on the last page. This is not so nice for CAD/AUD but if it keeps up, nice for inflation. Now to get those incompetent logistics guys to learn to read.

The place where data could be a scale-tipper is the UK. So far we have Rightmove reporting UK house prices up 9.3% y/y to a record, if with a lesser monthly gain this time. A potential explosive is a railroad strike starting tomorrow, joined somewhat mysteriously by Underground workers. Shades of the 1970’s! Meanwhile, confidence in the FinMin and PM is somewhat shaky in part because the policy response has been ragged–nobody knows what to expect next. We feel the earth shaking under the UK’s feet. Now would be a good time for the EU to strike back against Boris’ hubris on shoving the deal (and the European Court of Justice) out the door.

We can see no reason for the dollar to retreat except new positioning (because a ne0way street is just too boring). At risk are the commodity currencies if fear of recession keeps commodity prices on the defensive, and then the pound, The yen is at risk for a different reason–a stubborn MoF. Does anyone look at the dynamite in the box sitting right next to the C4–the JPY/CHF? We always say when in doubt, look at crosses but we wouldn’t touch that one with a bargepole.

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