Is the Fed going to hike the U.S. economy right off the cliff into a recession?
Or if not “definitely”, then at least “maybe”.
Or if not “maybe”, then today’s econ data at least “pushes us in that direction at the margin”, according to JPMorgan’s Michael Feroli.
I’m just kidding. I mean, I’m not really kidding, but that’s an overly sarcastic read on the situation which I think is appropriate because it’s Friday after all, and if you can’t appreciate some Fed sarcasm on a Friday, well then what is a good day for it?
Feroli wasn’t actually referring to the Fed overshooting on the way to murdering the cycle. Rather, he was simply noting that the prospect of Powell and co. delivering a total of four hikes this year instead of three rose on Friday, after the advance read on Q1 GDP came in ahead of consensus and ECI printed hotter than expected.
“At the margin” (to use Feroli’s characterization), the ECI number suggests wages are indeed accelerating. The 2.7% y/y print was the swiftest since the crisis. Here’s a quick take from Credit Suisse:
The ECI is less timely than other indicators of wage growth, but is more precisely measured, and tends to be preferred by the Fed and economists as a guide to underlying wage growth. Alternative measures of wage growth have accelerated moderately in the past few months. Average hourly earnings from the employment report stood at 2.7%YoY in March. The Atlanta Fed median wage tracker rebounded to 3.3% from 2.9% YoY, and remains the highest of all three. Overall, the ECI report today confirms the gradual upward trend in wage growth. We continue to expect wages to gradually accelerate in the months ahead as nominal GDP growth picks up and productivity improves. The gradual increase in wage growth should give the Fed confidence in inflation returning to target, without generating fears of imminent overheating.
And here’s something someone at Goldman typed from an Uber on the way to the bar after handing the reins to the algos once the last big data release for the week was in the books (not really – it’s from a longer piece, but Jesus, don’t you people have a sense of humor today?):
Taken together, this morning’s data indicate rising wage pressures and a firm underlying pace of growth that we expect to continue during 2018 (particularly as the effect of tax cuts on consumer spending becomes more apparent).
Core PCE at 2.5% only underscores everything said above.
Ok, so clearly the worry here is that this is going to embolden the Fed and that, in turn, is going to manifest itself in still more flattening pressure. Have a look at what the 5s30s did as soon as the econ hit on Friday morning:
There’s obviously a ton to digest here and as a couple of very smart people have noted over the past two weeks, there is no guarantee that the curve has retained its predictive power when it comes to presaging recessions. That said, the ongoing flattening (and indeed the first signs of inversion in the U.S. curve), pretty clear suggests that the market is pricing in either a policy mistake or an end-of-cycle dynamic.
The question for the punters and for dumb assets (like say, stocks), is what it’s going to take to restrike the Fed “put”. The answer may well be that stocks would need to sell off enough for financial conditions to tighten materially where “materially” means enough for the rates market to believe that the fear of God has been instilled in Jerome Powell. At that point, the market may start to take some of the hikes out, effectively restriking the Fed put for Powell.
Of course really, we might all be thinking too hard about this. As we’ve said on any number of occasions (see here for example), all it’s going to take is a couple of thousand Dow points on the downside for Trump to channel his inner Erdogan when it comes to rates “strategy.”
That’s your “put” right there.