There May Be More Hikes Ahead Based On The Fed's Data Reliance

In this inaugural issue of our Bloomberg Surveillance newsletter, Jonathan Ferro and Tom Keene kick off the two-hour show by sharing exclusive interviews and insightful articles from Bloomberg Television's flagship morning show, which is co-hosted by them and me. If you haven't signed up yet, you can sign up here.

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An Inflation Rate That Is Too High

I am wondering how policymakers can adjust to the data-driven world in which they inhabit, when readings about the economy do not align with the increasingly gloomy outlook in markets?

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In the opinion of Citigroup's Veronica Clark, it is simply a matter of raising interest rates because the data tells them to do that, so the Fed does what it is supposed to. There are worries about credit crunch and recessions, but Clark and the Citi team think that the Fed will simply ignore those fears and concentrate on the inflationary pressures that are building up.

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Other people disagree with that assessment, such as Mike Schumacher from Wells Fargo, who believes that facts could play a role in the outcome.

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I do believe that when you look under the hood of the business environment, it is evident that there is a rapid shift occurring, particularly for small business. According to a survey by the National Federation of Independent Business, 9% of small business owners who borrow frequently reported that getting financing has become more difficult in the past three months compared with three months ago. This is the highest percentage since December 2012.

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As a result, the two-week consecutive decline in commercial lending marks the biggest such decline on record in more than two decades, as reported in data from last week.

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It has appeared that we will not see a complete credit collapse at this point, Goldman Sachs's Peter Oppenheimer said in his report. However, he added that there would be more dramatic consequences than what we have seen before.

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The Concept Of 'groupthink' Is Worth Mentioning

This week, Surveillance is based in Washington, where the International Monetary Fund is holding its spring meetings this week. It will be interesting to see how the policymakers react to this. They seem to be united in their belief that they can manage inflation, perhaps even move it back to where it was pre-pandemic.

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It has been suggested that the latest downbeat forecasts from the IMF and World Bank, which were recently released, may be too dark than they appear, according to Doug Rediker, a former IMF board member who is now managing partner of International Capital Strategies.

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Rediker said that he had high regard for the economic teams in the media. But he added, "there is one caveat coming - the caveat is, there is a certain amount of groupthink that is affecting the message."

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IMF policymakers added a grim postscript to Mr. Geddes' remarks a short while after he spoke, reducing their global growth projections from 3% in January to 2.8% in 2023 and 2% in 2024, respectively, as a result of inflationary pressure.

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In spite of many dismissing IMF forecasts as having poor track records, the market is flirting with the possibility of rates rapidly returning to ultralow levels in the near future. It has been estimated by the market that inflation is going to hover around 2.18% in the next five to ten years, which is a bit higher than it was in pre-pandemic years, but not that much. Traders are predicting that over 80 basis points will be cut in rates before the year begins, suggesting that a monetary easing cycle is expected to take place in the near future.

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A company's profit margins are probably going to drop over the next few years, which has implications for companies.

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It's expected that earnings will fall in the wake of the recent bank failures, according to Alicia Levine at BNY Mellon, “because a lack of repricing of earnings isn't passing the reality test here.

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Next Up, We Have

It will be a confusing week with the release of the latest consumer price index data, out Wednesday at 8:30 a.m. New York time, followed by a big earnings report from JPMorgan on Friday at 3 p.m. When energy and food are excluded from consumer prices, they are actually expected to actually rise over the next year, which is exactly the opposite of what the Fed is hoping to do. As we are seeing in the data, one of the shifts we are currently seeing might be the fact that depositors are removing cash from their account in favor of higher-yielding money-market funds instead of deposit accounts. This may validate the shifts we are seeing in the data.

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We don't know what the Fed will do with such an uncomfortable juxtaposition, what will it decide to do about it.