By Michael Every of Rabobank
I-Bear-Ian
Apart from a downwards revision to Q1 GDP that made an already bad number look really ugly, most of yesterday’s main action took place in Iberia: and everything there was even worse. As a result, markets are truly I-Bear-ian.
After the Fed’s Mester (in the US) stated policy tightening was only getting started, is likely to mean 75bps in July, getting to 3-3.5% Fed Funds by year end, and to over 4% by early 2023, we also got the usual collection of central-bank warblers-in-chief in Sintra, Portugal.
Powell stated the global economy is in a “new world”, which is something this Daily has been trying to tell people like him for a long time. He also admitted, “We understand how little we understand inflation,” which is something covered here recently. He underlined fears that inflation will stay above 2% for a long time as we transition into a higher inflation regime, and that his job “is literally to prevent that from happening. And we will prevent that from happening.”
That appears to be a response to Mohamed El-Erian warning of the dangers of the Fed doing something the market is not considering: cutting --which the market is pricing in, and ever sooner-- and then having to *hike* rates again. Indeed, either the Fed don’t understand how little they understand about inflation, and a deflationary crash looms - Powell was closer to admitting a recession lies ahead; or the market doesn’t understand how little they understand about inflation, and after deflation, a further wave of inflation returns, as during previous high inflation regimes.
Once retailers have slashed...