US And Europe May Announce Tariff Truce

The Deputy Governor of Hungary's central bank put the market on notice today that it could raise rates as early as next month. It is not clear if Virag speaks for the majority. The central bank meets on May 25, and it should help clarify the outlook. However, the Deputy Governor also suggested that QE could continue and even at higher levels if necessary. April CPI was 5.1% higher than a year ago, well above the 2%-4% target range. It was a little above the central bank's forecast and is the most in the EU. The Czech Republic is also expected to raise rates in August as it too deals with rising price pressures. 

The euro is extended its pre-weekend gains as it turns better bid in the European morning. As it went through $1.2150, some demand, perhaps related to the expiration of a nearly 2 bln euro option there that expires today, helped the single currency edge closer to last week's highs, a little above $1.2180.Still, that might be a bridge too far today as the intraday momentum indicators appear stretched. Sterling is straddling the $1.41-level in dull dealings. Last week's high was set near $1.4165, which also does not seem to be under threat today. The euro had fallen to around GBP0.8560 last week but recovered in the last few sessions and today has held above GBP0.8600.  


Two weeks before, Europe was going to double to 50% the retaliatory tariffs on US goods levied to counter the 2018 steel and aluminum tariffs Washington imposed on many countries on national security grounds. Brazil and South Korea cut separate deals, and the USMCA ended the tariffs on Canada and Mexico. A US-EU truce has been declared. The EU will not double its tariff and will enter talks with the US about excess capacity in the steel industry. Although many economists talk about surplus savings, they usually refer to the part that stays in the circulation of capital. Still, the redundant investment was classically understood as a form of surplus capital. A reduction in tariff schedules could theoretically help ease price pressures, but we are suspicious of how much would actually be passed on to the end-user. Still, April import prices were reported before the weekend and jumped more than expected. The 0.7% increase lifted the year-over-year rate to 10.6% from 7.0% in March. Through April, import prices have risen at an annualized rate of around 14.5%. Excluding oil, import prices have risen by around 9% at an annualized pace this year.  

The University of Michigan's consumer confidence survey was reported on the heels of the import price jump. The 5-10 year inflation expectation rose to 3.1%, to match its highest level since August 2008. After the earlier larger than expected rise in April CPI and PPI, some astute Fed watches emphasized the importance of inflation expectations in the Fed reaction function. It is true, inflation expectations/forecasts feature prominently in the official commentary. That said, we argue that there has been a subtle shift that has downgraded the role of inflation expectations/forecasts. This is not a normative claim (what ought to be the case) but a descriptive claim (what is the case). Various Fed officials have expressed this in different ways. Still, Chair Powell speaks for the Fed when he said, "The fundamental change in our framework is that we're not going to act pre-emptively based on forecasts for the most part, and we're going to wait and see actual data."To us, this may be more important operationally than adopting an average inflation target, as the "average" has not been defined. Instead, it looks as if it is a ploy to preserve maximum flexibility for the Fed in this unprecedented time. But the emphasis on actual data (not eschewing expectations but downgrading them) helps explain the Fed's patience now.  

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Read more by Marc on his site Marc to Market.

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