A Feast of Data

• US data is consistent with Fed hiking by 25 bps and hinting at a pause
• We expect the ECB to hike by 25 bps, but with some hawkish complements. It is not “done”.
• BOJ may be “taking one for the team” by opting for slow monetary normalization

Since monetary policy has moved towards data dependence – at least rhetorically - last week’s “feast of data” was key, even if some crucial releases are still missing in the case of the ECB ahead of its Governing Council meeting.

US GDP grew less than expected in Q1 and, importantly, below its potential pace. Some of the details paint a less clear picture – a lot of the weakness came from an inventory drawdown, which can be interpreted in many ways – but even the apparent strength in personal consumption should not spook the Fed into thinking that excess demand is still very much here: a lot of it came from a jump in January, with much less momentum in the following two months. True, the Employment Cost Index for Q1 suggested that wage pressure remains strong but, combined with signals that the banking turmoil is not completely abating, there is probably enough in the overall data flow at the disposal of the FOMC to solidify a hike of “only” 25 bps with hints that the rate peak may well have been reached.

GDP also grew by less than expected in Q1 in the Euro area. This removes one of the arguments of the hawks who are pushing for a 50-bps hike. Our baseline is that the ECB will deliver a 25-bps hike, as it seems that core inflation may – just – have peaked (national data from last week need to be confirmed) and because we expect the incoming Bank Lending Survey and credit origination data for March to show the monetary tightening is working its way. It is a close call though, and we think a 25-bps hike will have to come with some complements to keep the hawks on board, e.g., clear hints in Christine Lagarde’s Q&A that the ECB is not done, or possibly some signals of an acceleration in QT after the end of June.

Meanwhile, the BOJ maintains its specific course. The policy review signals a willingness to start normalising policy in Japan as well, but without any haste. This is welcome from a global financial stability point of view.