The week star of the show will be the PCE price index on Thursday

Outlook: This week the star of the show will be the PCE price index on Thursday. Bloomberg reports a consensus forecast of 2.8% y/y from 2.9% in January. Even though the m/may go up, with

headline up 0.3% and core a bigger 0.4%. Today we get new home sales and the Dallas Fed manufacturing survey for Feb, neither a noteworthy market-mover.

Before then (tomorrow), we get consumer confidence and on Friday, the ISM manufacturing PMI, generally considered a bit better than the other one (from S&P).

The Reserve Bank of New Zealand is imagined by some to be in hiking mode—both TD and ANZ call for a hike this time (Wednesday) and another one at the May meeting. Two other banks are calling for a hold. A recent survey by the central banks showed consumers are not anchored to falling inflation and the 2-year outlook is for a rise to 3.2% from 3.0%. Let’s note once again that “expectations” are feelings, almost certainly not well informed, and feelings can be manipulated by strong words. It’s possible the RBNZ just shouts hawkishly.

We get CPI from Australia on Wednesday, possibly a tiny rise that would justify a seemingly hawkish RBA tone. We also get the eurozone flash CPI on Friday, and it may well come in nicely at 2.5% from 2.8% in Jan, with core down to 3% from 3.3%. It’s not clear this will accelerate any rate cut bets, though.

Every financial report today notes that the expectation of Fed rates cuts has gone from 6-7 a few months ago to barely 2-3 today and May having morphed into June—at best. One analysis from the well-regarded Bianco says if it’s September or November, it will look “political” no matter what. We see three things in the pullback: first, the market went overboard in the first place and is now going overboard in the other direction. The no-cut crowd is still talking about the too-strong labor market, when the Fed has hinted or said out loud that it no longer sees employment data as determinative. For example, the drop in commercial bank lending is a clue that high rates are taking a toll. This is Lag at work.

Second, the gloomy no-cut narrative seems to forget the power of rhetoric. Whatever the data, if enough Feds say they are satisfied the direction looks sustainable and they are backing away from cautiousness, the market knows how to read that. Third, there in nothing in the rule book that says the Fed (or any central bank) can’t move between meetings. This is a remote possibility, but not out of the question. Bottom line—the rate cut mania went too far and now has gone too far in the other direction. A balance is due.

Then there is one more thing—aside from Australia and New Zealand, the major central banks have all pretty much admitted the next move is rate cuts. We have to believe they are all talking to one another behind the scenes. They don’t want to be seen to be cutting prematurely, but we would guess they still have June in mind and will try to herd the markets to that universal consensus—if only to avoid currency volatility. The BoJ is not the only one that dislikes FX volatility. This is a smell more than anything and hardly reliable,

Forecast: The market is still correcting or “consolidating” with sentiment all over the place and any single big player capable of setting off a move or counter-move. Longer run, the US has the economic growth, the ostensibly sensible central bank, and the overall moxie to drive the dollar higher. Some forecast the dollar higher all year, although that seems to be going a bit too far. Again, logic is not the only or even the key factor in sentiment so we may be twiddling our thumbs for a while.

Tidbit: If you are looking for economists to follow, we have two we like—John Authers, formerly at the FT and now at Bloomberg. And Goldman chief economist Jan Hatzius, who called the subprime 2008 crash and recession. Hatzius sees the soft landing this time working just fine. The Fed’s 2% target for core PCE inflation will be approached very closely. The Goldman team created a financial conditions index that combines interest rates, bond yields, stock prices and the dollar. How we wish we could see it! You can get some briefings online but not the Big Papers.

The WSJ ran a profile of Hatzius over the weekend, including the Goldman forecasts vs. the consensus. We like what little we can find about the Goldman forecasts because they tend to agree with our own (!). The most recent forecast holds that the latest jump in rents /housing costs from the BLS is an anomaly.

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