Entering a monster week for global markets.
Policymakers across the G7, from Washington to Tokyo are expected to keep rates steady as they continue to watch the fallout from the Middle East conflict.
Now burned by the transitory inflation mistakes of 2022.
Central bankers are refusing to blink as energy costs surge, at least for now.
And in Washington, the Justice Department has abruptly ended its probe into Jay Powell clearing the runway for Kevin Warsh's eventual fetch her confirmation.
Meanwhile, the US consumer officially cracking the University of Michigan sentiment index plunging to a record low, while this week's GDP figure is expected to show a 2.2% rebound for the first quarter of this year.
Well joining me as we kick off a big week is LPL Financial's Chief Economist Jeffrey Roach.
Jeff, good morning.
Thank you so much for joining us.
Well across the G7 this week, central banks are widely expected to hold the line on rates, but given what we're seeing in the Middle East as well as the rising cost of energy, what do you expect to hear from the central bankers?
Well, I think these central bankers are continuing to highlight the fact that things are uncertain.
We really don't know the impact, the full impact on growth and inflation, and I think that's going to be communicated pretty clearly this week.
So, uh, as you mentioned, we do have a pretty busy week.
Bank of Japan, European Central Bank, of course, our own Central Bank of the United States, Federal Reserve, midweek.
And it's going to be really more of the same.
We, we perhaps of those major central banks, the US is perhaps on a little bit better footing.
So we have some pretty decent growth numbers coming out of the first quarter and the labor market is holding steady, which gives the Fed a little bit of excuse to do the wait and see.
So no expectations on rate changes this week.
And I think the the biggest pressure point will be how long will energy prices stay elevated and what are the second order effects.
Certainly that's yet to be seen on, on consumer inflation in the United States.
So busy week full of challenges for several of the central banks around the globe.
And building on what you just said, Jeffrey, US consumer sentiment just hit a record low, falling below levels seen in 2008 and the COVID pandemic.
But at the same time we're looking at retail sales still holding up here in the US thanks to tax refunds as well as some of this front loading of purchases.
But do you trust some of the hard spending data, or is this historic collapse in sentiment, would you say the ultimate canary in the coal mine for the economy?
Well, there, there are often periods of time where sentiment is giving you a different signal than the hard data.
So we, we often like to say, don't listen to what consumers are saying, watch what they're doing.
Where are they spending their dollars?
You're exactly right.
So retail sales for the month of March, and that's really important for your listeners to know, this is after the attack.
And the war in the Middle East and the challenges with the Strait of Hormuz and supply chains, March retail sales, March auto sales, several data for covering the month of March were pretty decent, in contrast to the very, very weak sentiment numbers coming out of University of Michigan.
So conflicting signals for sure.
And another data point that we're watching on the economic calendar here in the US is Thursday's PCE report and that is expected to show inflation accelerating to its fastest pace since 2023.
We did see March PPI as well as CPI figures.
So would you say the central bank of the US, the Federal Reserve, do they have any actual runway left to cut rates before, say, November of this year?
Well, I think they do have a little bit more runway if, and that's the big if, inflation is near term.
So the pressures that we're seeing for March, April, by the time you get to summertime, if inflation is going back to a little bit of that decelerating trajectory, that gives the Fed the runway.
So there's a little bit of.
Uncertainty.
It's not entirely clear if that runway is much longer.
So that's what I think investors are going to have to wait and see what happens with the second order effects.
I think in terms of this week, yes, we're going to get a hot PCE reading.
I don't think markets are going to be surprised at all.
It's, it's a no brainer.
Of course it's going to run hot because we know we saw a spike in.
Gas prices, we saw a spike in several other commodities related to energy.
And so, the, the bigger question, the uncertain question is, what is it going to look like in the months ahead.
I think we are going to see inflation decelerate, but we're going to have to wait until the 3rd and 4th quarter of this year before that actually happens.
And Jeffrey, another data point we're paying attention to is GDP.
So we want to see what comes out for Q1 of this year, and that is projected to print a healthy 2.2% advance driven heavily by business investment.
But given that we're seeing the softening in consumer spending and energy costs are rising, would you say this growth is an illusion?
What's actually happening below the surface?
Right, so you think about economic growth hitting a 2.2, 2.3% number for Q1 annualized, uh, consensus actually moved a little bit closer to our own LPL forecasts.
We think that that's, uh, consistent with the data, a good, maybe a good 2 point and some change on Q1.
The reason why it's important to look at how Q1 growth was, it really provides a snapshot on how businesses and consumers are faring.
What kind of dry powder do they have to manage through the uncertainty of Q2, particularly, and perhaps Q3.
And I think at this point we're seeing a fairly decent. amount of activity both on the business side and the consumer side.
One of the things of course that we're seeing with strong economic growth numbers is we're just importing a lot less given.
The tariffs, we've seen a little bit of a reversal in that trade deficit, so less negative, meaningless subtracting on the headline numbers for growth.
So we do think the economy's going to avoid recession.
That's the R word that we do need to bring up here and there if indeed we have some resolution.
In supply chains, particularly in the crude oil markets, so I don't think a recession is likely in the United States still, despite all these shocks.
I think the bigger risk is the weakness we're seeing in Germany, other European countries, as well as Japan, some of the weakness in the economic growth figures there.
And while we're on this topic, I do want to get your take on what this means in terms of rate differentials just given the fact that it is a big week for global central banks.
So what does this mean?
Well, when you have challenges in normalization, it means that you have a little bit more volatility and uncertainty in the in the currency markets, and that flows through in other banking and lending and credit related variables.
I think the big thing here that we're going to see this week is continued weakness in the Japanese yen.
Typically when the yen is as weak as it is now, so 159.
That typically signals that the Ministry of Finance over Japan will start intervening to bolster the yen.
I don't know if they have quite that ability to do that right now and the political will to do that.
And so that's going to create a little bit of volatility in the currency markets.
That's something that we just need to build into our expectations for this week.
It's a big week for global markets, Jeffrey, so thank you so much for joining us and thank you so much for sharing all of your insights as well as your perspective.
Take care.
