Daily Brief Macro: Belated Fed Hawkishness Makes Recession Inevitable; Rate Cut Likely by Jul’23 and more

• FOMC hiked the Fed Funds rate 50bp to 4.25-4.5% as expected, and raised the median forecast to 5.1% for end-2023. We still expect a 5% peak in Mar’23.
• M2 grew faster in Mar’20-Feb’22 than in any month for a century. But M2 decelerated to 1.25%YoY growth in Oct’22, so core PCE inflation will ease to 3.5% by Mar’23.
• The steeply inverted yield curve and ISM new orders (<50 for 3 months) make recession inevitable by Q2/2023. Core Inflation at 2.5%YoY will bring a 25bp rate cut in Jul’23.   

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• The final EA HICP inflation print raised the headline by 3bps in Nov-22, causing it to round to 10.1%. Italian energy and core news among smaller states drove the change.
• Underlying inflationary impulses are diverging, with Germany and France near their peaks while Spain slows. These pressures all remain inconsistent with the target.
• Tolerance for persistently high inflation is running low, encouraging the ECB to sustain its forceful hikes. Further falls in headline rates should not be mistaken for victory.

• After another 50bp from the Fed, we believe that the major impact of changes in expectations of the Fed will now be via the $ rather than via capital markets – the discount rate already having had its impact.
• So too with the ECB; this time a year ago everyone’s favourite synchronised swimmer and Lawyer, Christine Lagarde effectively ruled out any rate rises in 2022, in contrast to market expectations, before, in synch swimming parlance, the ECB performed its part in a perfect Cadence Action of central banks raising rates all year.
• Today she said that the ECB now needs to do more on rates than markets are pricing in, seeming to indicate a break from the Fed.

• Retail sales disappointed an overly optimistic consensus as levels normalised after the Amazon Prime Early Access sale. The declining trend remains intact.
• Real wage trends are declining and taking consumption with it as inflation erodes even high nominal spending, although values fell by 0.5% 3m-o-3m in Nov-22.
• Surging mortgage rates have collapsed confidence in the housing market, causing prices to start declining. Associated consumer spending will also take a hit soon.