I Want To Believe

By Benjamin Picton of Rabobank

I Want To Believe

As a kid growing up in the 1990s The X-Files was one of the coolest shows on TV. Mum (Mom for our American audience) would never let me watch it, because it would give me nightmares, but on the occasions when Dad was left in charge I could convince him it was ok. For those who have never seen it, the basic premise is that FBI agents Fox Mulder and Dr Dana Scully investigate mysteries with a supernatural or extra-terrestrial bent. Scully is a sceptic; she always has a scientific theory to explain unusual phenomena. Mulder, on the other hand, “wants to believe”.

We want to believe too. Specifically, we want to believe Jerome Powell’s assurances that a soft landing for the US economy is still possible. Inconveniently, like a kill-joy Scully, economic data keeps throwing up evidence to suggest that this theory is far-fetched. Yesterday we got our first look at first quarter GDP figures for the United States. The numbers were unequivocally disappointing. Annualized growth was a measly 1.1% vs a Bloomberg consensus estimate of 1.9%. Even more disappointingly, the core PCE deflator lifted from 4.4% in the final quarter of last year to 4.9%, which was two ticks above what the market was expecting. That looks an awful lot like stagflation, but labor markets are still holding up (for now). US weekly jobless claims fell by 16,000 to 230,000.

Powell himself wants to believe. He has been suckered twice in the last 24 hours. Firstly by Argentina, who have agreed to pay for their imports from China in CNY in order to conserve precious dollars. As my colleague Michael Every put it, Powell must have been singing “don’t CNY for me Argentina”, and regretting that the Fed never extended a dollar swap line to prevent the Argentinians from knocking another leg out from under the dollar system. Already having a bad day, Powell was then embarrassed by the release of a video of two Russian comedians pranking the Fed chief over the phone by apparently convincing him that he was speaking to Ukrainian President Zelensky. Zelensky himself has a past life as a comedian, so I guess it’s an easy mistake to make.

Looking at dataflow over the course of the week, things were very mixed. There was certainly a theme of juxtaposition between banks and the tech stocks as we saw strong results from Microsoft, Google, Meta and Amazon, but banks have been under pressure since the release of First Republic’s results on Monday. Both US Treasuries and German Bunds have bear-flattened over the course of the week, and oil markets have been volatile. Brent crude fell below $80/bbl for the first time since March 31st, despite data last week showing an unexpectedly large decline in inventories, and crack spreads have been tightening as refining utilisation grows and confidence deteriorates. Meanwhile, a Bloomberg survey showed that market participants believe that the banking crisis adds about 50bps worth of endogenous tightening to US credit markets. Nobody knows what the real number is, but that’s twice as much as Jerome Powell had suggested.

The DXY index has weakened a little over the course of the week, while EURUSD has held on to gains and is on track for a weekly close above 1.10. The week ain’t over yet though, and with a BOJ meeting today and European first quarter growth figures due out, there are still plenty of catalysts for volatility ahead. Indeed, Tokyo CPI inflation numbers released this morning show y-o-y price growth of 3.5% in April. That’s two ticks higher than expected, and the core readings look even stronger. Meanwhile, the Japanese jobless rate rose to 2.8% when it was expected to fall one tick to 2.5%. That all looks stagflationary too, but new BOJ Governor Ueda has said that the economy is past the peak for cost-push inflation. We want to believe!

Europe has been a bright spot this week. Wars and fractious political systems aside, the continent has been outperforming everyone’s low expectations from last year. That is why we have been seeing a bid in EURUSD for a few weeks now. Similarly, the Euro Stoxx 50 is up by almost 15% YTD. That really puts the S&P500’s 7.7% YTD gain in the shade, and is only beaten by the 16% lift in the NASDAQ. Several ECB speakers this week have been upbeat on European growth prospects. Philip Lane told Le Monde on Tuesday that the dataflow is strong enough to justify another rate rise next week, Isabel Schnabel suggested that hike might be a half percentage point, while Luis de Guindos said that fears of a recession in the first quarter would not be realised. Rabobank Research concurs, and this week published a note detailing our view that Eurozone 1st quarter GDP figures released today could come in stronger than the expected 0.2% q-o-q as receding supply shocks and China reopening have helped manufacturing output to lift.

It has also been a big week in the Land Down Under. Markets had been eagerly awaiting the release of 1st quarter consumer inflation numbers this week to shore up bets on what the RBA might do when it meets to set monetary policy next Tuesday. The inflation report was mixed at first blush, but ultimately perceived as soft by rates traders. The trimmed-mean measure came in two ticks below expectations at 1.2% q-o-q, while headline inflation was a tick stronger than consensus estimates. Crucially, the report showed that non-tradable inflation at 1.9% was much stronger than the 0.3% for tradables in the quarter. This was a similar result to the New Zealand CPI report last week, and really highlights that inflation is now being domestically generated and can no longer be credibly blamed on broken supply chains and Vladimir Putin.

Australia is doing a little better than New Zealand on the trade front though. Figures this week showed Aussie export prices unexpectedly lifted by 1.2% in the first quarter, while import prices fell by 4.2%. That means that the Aussie terms of trade boom is still rolling on, but over in New Zealand it is a different story. Data this week showed the Kiwi trade deficit widened to $16.4bn over the 12 months to March as demand for dairy, proteins and timber products continues to be lacklustre. Those numbers look diabolical for an economy that is heavily dependent on foreign financing, running a fiscal deficit of ~4.9% and recorded a contraction in GDP of 0.6% in the December quarter. Can New Zealand avoid stagflation? We want to believe