Data Refuses to Behave

• Stronger than expected job creation raises doubts on the Fed’s pause, while lower than expected CPI helps the ECB doves. We however still see the two central banks proceeding as planned at their June meeting.
• Super-low inflation in China should trigger an export-led recovery and help tame global price pressure, but geopolitics get in the way.

The stage had been carefully set for a pause at the FOMC meeting on 14 June, while a day later the ECB would deviate by hiking further. The recent dataflow is however raising some questions. In the Euro area a bigger than expected deceleration in core inflation in May is providing the doves with some arguments to proceed more carefully while in the US strong job creation is casting doubt on the pace at which the economy would finally land.

The details in the data are however consistent with the two central banks proceeding as planned at their next meetings. The inflation decline in the Euro area owes too much to one-offs and while we continue to think there is more evidence that the European economy is slowing down, there is also still too much acquired speed on the labour market for the ECB to feel relaxed about the risk of a wage-driven inflation second wave. However, we are marginally more confident with our baseline that July, and not September, will be the peak in policy rates for the ECB. In the US, job creation according to the Establishment Survey is contradicted by the Household Survey, while some wage moderation seems to be underway, especially when taking working time in consideration. Yet, the issue is less about June than about the possibility that the Fed resumes hiking in July. We are counting on more evidence of the downturn accumulating in the next two months to ultimately stay the Fed’s hand, but it’s a very close call. In any case, we welcome the fact that the market is now pricing a lower probability of rate cuts in the second half of the year, consistent with our long-held view that the Fed will not revert stance as swiftly as investors expected.

Finally, we look at the Chinese dataflow but rather than focusing on evidence that the recovery is now sputtering – it clearly is – we are more interested in the fact that inflation remains super low over there.  In normal circumstances, the ensuing competitiveness gain would trigger an export-led recovery which would help tame inflation globally. Politics however are getting in the way, as the US is reducing its reliance on Chinese products.