Now that He's in 2024 Race, DeSantis Needs More Than Anti-Trump Voters

Political

Summary:

If Ron DeSantis hopes to defeat Donald Trump and win the 2024 Republican presidential nomination, he will ultimately have to bring every possible anti-Trump voter he can into the fold. But even that likely will not be enough, political analysts say.

DeSantis will also have to pull some supporters away from Trump — and that could make for a tricky balancing act that DeSantis is already struggling with.

"You can't court MAGA while courting the rest of the party," said Chris Stirewalt, a Republican analyst with the American Enterprise Institute, referring to Trump's diehard supporters in his Make America Great Again movement. "That's a difficult decision he is going to have to make."

The Florida governor announced his bid on Wednesday after months of speculation. With deep financial resources and a growing national profile, DeSantis will quickly become Trump's top rival in the race.

But he will have much work to do: Reuters/Ipsos polling conducted this month showed Trump backed by 49% of Republicans and DeSantis 19%.

DeSantis' initial challenge is that the anti-Trump field is fractured. Nikki Haley, Trump's former ambassador to the United Nations, and Tim Scott, a U.S. senator from South Carolina, among others, are already in the race, with more candidates such as Trump's former vice president, Mike Pence, perhaps to follow.

DeSantis' campaign will have to figure out how to appeal to mainstream Republicans turned off by Trump while also finding ways to attract conservative voters who may be unsure about supporting Trump in 2024 even if they have backed him before.

"He can't win the nomination with only non-Trump votes," said Sarah Isgur, a veteran of several Republican presidential campaigns. "He has to peel voters away from Trump."

A longtime Republican pollster, Whit Ayres, argues that the Republican electorate is divided into three segments, with Trump die-hards comprising about 30-35% of the party, anti-Trump voters making up about 10% and the rest somewhere in between - what he calls "maybe-Trumpers."

"It looks to me like DeSantis is going after the always-Trumpers rather than the maybe-Trumpers," Ayres said.

That's a waste of time, Ayres said. Instead, DeSantis' mission should be to convince "voters looking for an alternative to Trump that he's the right guy."

Stirewalt agrees, saying DeSantis needs to first build a strong base within the segment of the party not aligned with Trump before he can try to broaden his appeal.

"He needs a launchpad," Stirewalt said.

DeSantis appears, however, to have chosen to court the party's most conservative voters - and those most likely to stay with Trump - to the dismay of some potential donors and supporters.

As governor, he signed one of the most restrictive abortion bills in the nation earlier this year, and made it easier for residents to carry concealed weapons. He suggested supporting Ukraine was not in the national interest before backtracking under a fire storm of criticism.

And his continued feud with Walt Disney Co., one of the largest employers in Florida, has baffled some traditional Republicans who prefer a hands-off approach to corporate governance.

DeSantis' political team did not respond to a request for comment.

In a telephone call with donors last week, DeSantis said Trump would not be able to beat Democratic President Joe Biden and that he was the only one capable of winning both the Republican primary and the general election, according to the New York Times, which listened to the call.

An analysis of recent Reuters/Ipsos polling data shows that the core DeSantis voter is more likely to be an older college graduate who lives in the suburbs and drives an SUV. Trump's strength is pronounced among younger, less educated voters who are more likely to live in rural areas and drive pick-up trucks.

In Reuters/Ipsos polling conducted this month, Trump garnered 36% of Republicans with a college degree, and DeSantis 26%.

The poll showed Trump dominating among rural Republicans 53% to 19%. But the gap narrows in the suburbs, where Trump has 44% of Republican support to DeSantis' 21%, the poll found. A separate Reuters/Ipsos poll in March found 43% of DeSantis supporters said they drove SUVs, compared to 31% of Trump supporters.

A DeSantis voter is also more likely to want the United States to strongly support Ukraine in its war with Russia, to not believe the 2020 election was riddled by fraud, and to be strongly opposed to progressive policies such as affirmative action and the teaching in schools of so-called Critical Race Theory, the argument that the U.S. is riven by systemic racism.

Trump's own prospects are clouded by his ongoing legal problems, including being indicted for a hush-money scheme involving a porn star, a recent finding by a New York jury that he committed sexual abuse, and the potential for charges stemming from his efforts to overturn the 2020 election.

Isgur said DeSantis has time to build a winning coalition, arguing that non-Trump voters are likely to forgive the Florida governor for tacking hard to the right to chase some Trump supporters if it helps him secure the nomination.

But can DeSantis pull it off?

Isgur has her doubts, given Trump's strength. "I'm just not sure it's possible," she said.

Source: The Japan Times

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Damon

Energy

Solar power is a key driver of Europe's energy transition away from fossil fuels, with solar capacity growing by more than twice the pace of wind capacity since 2018 as governments and utilities across the region accelerate green energy roll-outs.

Installed solar capacity in Europe has jumped by 88% since 2018, dwarfing the 35% rise in wind capacity over the same period, and in 2022 accounted for 24% of Europe's clean energy generation, versus wind's 26%, data from think tank Ember shows.

Further rapid growth in solar capacity is expected in the coming years thanks to massive government support, and could result in solar power overtaking wind as the primary source of Europe's clean electricity within the coming decade.

Europe's South Needs to Realise Its High Solar Potential_1

However, nearly 60% of Europe's installed solar capacity is located in northern European countries such as Germany, The Netherlands, France, Belgium and Scandinavia, which are often cloudy and have reduced daylight during winter, which results in relatively low solar power yields compared to other areas.

Europe's South Needs to Realise Its High Solar Potential_2

As a result, much of the next phase of growth in Europe's solar capacity is likely to take place across the southern parts of the continent, which are better suited than the north for large scale solar power generation thanks to far more year-round sunshine, and often more land that can be used for utility-scale solar plants.

Full Potential

A useful measure of how suitable an area is for solar power production is the so-called practical solar photovoltaic (PV) output potential (PVOUT).

The PVOUT metric is a measurement of the power output achievable by a typical utility-scale PV system, taking into account local land use constraints and the amount of solar radiation available to generate power.

According to the Global Solar Atlas, "the PVOUT represents the amount of power generated per unit of the installed PV capacity over the long-term, and is measured in kilowatthours per installed kilowatt-peak of the system capacity (kWh/kWp)."

Europe's South Needs to Realise Its High Solar Potential_3

A ranking of European countries by this metric shows that Spain has nearly 50% greater solar potential than Germany, which is by far the region's largest solar producer.

Spain's PVOUT reading of 4.41 kWh/kWp is the highest in Europe, and compares to 2.96 for Germany, 2.86 for The Netherlands, and 2.84 for Denmark and Sweden, according to data published by the World Bank and SolarGIS.

In 2022, Spain had 20.52 gigawatts (GW) of installed solar power, according to Ember. That compares to more than 66GW in Germany, and 22.6 GW in The Netherlands.

However, Spain's capacity growth of 190% since 2018 is among the highest in the continent, and the country's growth pace looks set to continue exceeding the regional average thanks to new and more aggressive climate-related ambitions being considered by the Spanish government.

Expanded solar capacity is a key feature of those plans, with French energy firm TotalEnergies announcing this week that it received environmental permits for 3 gigawatts of solar capacity across 48 planned plants in the Madrid, Murcia and Aragon regions.

Neighbour Portugal, which also scored highly in terms of PVOUT, is also planning rapid renewable energy expansion, with the country's largest utility EDP in March saying it will spend 25 billion euros ($27 billion) over four years to nearly double its renewable energy capacity to 33 gigawatts (GW) by 2026.

Andorra, Greece, Italy and Bulgaria also have relatively high PVOUT scores thanks to abundant sunshine as well as suitable pockets of land that could be deployed for use as solar farms, and are all expected to see large government support for solar projects in the coming years.

In combination, these batches of projects could help push southern Europe's share of solar capacity sharply higher from the roughly 26% share of Europe's total capacity in 2022, and help put the south on the map as a key new frontier for Europe's solar power generation over the coming decades.

Source: ET EnergyWorld

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Justin

Economic

Bond

Instant settlement of debt securities is frequently cited as something that can be achieved with electronic debt capital markets platforms and digital bonds. But it is simply not realistic when the current payments system in bonds markets is flawed.

The developments in digital bond markets, ways to improve the inefficiencies in primary debt markets and the challenges faced by issuers were discussed in detail at the Public sector debt summit, hosted by OMFIF’s Sovereign Debt Institute in London. This exclusive, in-person event brought together around 20 global sovereign, supranational and agency borrowers, a similar number of investors as well as other key market participants to explore the important issues facing the public sector bond market.

Speed over efficiency

Settlement of SSA bonds typically takes five to seven days. This is referred to as ‘T+5’ and ‘T+7’, where T is the transaction date and the number being the amount of days after which the bonds settle – when the security clears from seller to buyer. Electronic DCM platforms and digital bonds can speed up this settlement and even bring same-day settlement. But this has its problems: one head of funding at a leading supranational borrower at the summit described T+0 settlement as ‘fundamentally problematic’.

‘I’m not convinced at the moment when we have failed now to be able to make very simple payments correctly through the systems in a way that it should that [T+0] is actually even desirable,’ she said. ‘Maybe at the moment we need to be working out how we go back to basics to ensure that we can all agree payments in a very seamless way before we then start trying to take the next steps.’

It is simply not possible to digitalise the entire chain of issuance in the bond markets, particularly on payments where not all systems agree on the same number. ‘Sometimes we need to go back to Excel spreadsheets, because our system is not going to produce the same answer as a bank system, which is going to be different than the paying agent, which is going to be different than the other leads,’ she explained.

When new risk-free reference rates were being rolled out a few years ago, public sector borrowers ran into many issues with the first coupon payments for those deals. The issuers’ internal and external systems all produced different figures thanks to differences in rounding, causing issuers to manually calculate the coupons on Excel spreadsheets before a new structure for those transactions was introduced. This is an example of where digitalisation and real-time settlement would have created more problems rather than a solution.

Business problem, not technology

In addition to the issues around payments, there are concerns for global investors in different times zones. As safe-haven assets and highly rated, SSA bonds are high-demand securities with investors all over the world entering the books of these deals.

‘Fundamentally, it is a business problem, not a technology problem,’ said a senior official at a settlement house. ‘And the business problem first needs to be addressed, before we run with the technology.’ In a poll of the attendees at the summit, 75% said T+0 was not achievable from a business perspective.

T+2 or T+3 settlement is perhaps more realistic to take into account the different time zones for investors across Asia, Latin America and other regions. Any settlement quicker than that is problematic for custodian banks to get all the information from investors and send the money for settlement.

There was unanimity among issuers at the summit on the need to improve the inefficiencies of the technology and systems in bond markets before the advancement in technology and the introduction of digital assets.

‘We always forget that internal digitalisation is probably the biggest challenge,’ said a senior funding official at a European agency borrower. ‘To go from paper to a purely digital document and how to integrate that in the process.’ The official said the issuer was working on a test trade via a digital post-trade platform to see how they could digitalise the process of issuing bonds.

‘What I’ve learned is that we have to take small steps, so that’s what we’re trying to do,’ said a treasurer at another European agency borrower, who said they were onboarding a digital platform’s workflow system. ‘We issue bonds many times a year, so how can it be that legal documentation takes such a long time, because I would assume that the legal documentation is the same every time and that you only have to adjust the coupon and maturity?’

The reality is that bond markets have not moved a long way towards digitalisation and there is much more work for all parties in the debt capital markets to get on with.

Source:Burhan Khadbai

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Devin

Political

Once labelled a pariah, Saudi Crown Prince Mohammed bin Salman took centre stage as master of ceremonies last week when Arab states readmitted Syria to the Arab League, signaling to Washington who calls the regional shots.

His effusive greeting of President Bashar al-Assad at the Arab summit with kissed cheeks and a warm embrace defied U.S. disapproval at Syria's return to the fold and capped a turnabout in the prince's fortunes spurred by geopolitical realities.

The prince, known as MbS, seeks to reassert Saudi Arabia as a regional power by using his place atop an energy giant in an oil-dependent world consumed by the war in Ukraine.

Shunned by Western states after the 2018 killing of journalist Jamal Khashoggi by a Saudi hit squad, the prince has now emerged as a player whom Washington can neither disregard nor disavow, but must deal with on a transactional basis.

Skeptical of U.S. promises on Saudi security and tired of its scolding tone, MbS is instead building ties with other global powers and, regardless of Washington's consternation, remaking his relations with their shared foes.

His blithe confidence on the world stage was not only visible in his reception of Assad. Ukrainian President Volodymyr Zelenskiy came to the Jeddah meeting and MbS offered to mediate between Kyiv and fellow oil producer Moscow.

To be sure Saudi Arabia still depends militarily on the United States, which saved it from possible invasion by Saddam Hussein's Iraq in 1990, monitors Iranian military activity in the Gulf and provides Riyadh with most of its weapons.

Still, with Washington seemingly less engaged in the Middle East and less receptive to Riyadh's anxieties, MbS is pursuing his own regional policy with less apparent deference to the views of his most powerful ally.

"This is a strong signal to America that 'we're reshaping and redrawing our relations without you'," said Abdulaziz al-Sager, Chairman of the Gulf Research Center, of the summit.

"He is not getting what he wants from the other side," Sager added, saying Saudi Arabia's ententes with regional foes were based on Riyadh's approach to regional security.

Diplomatic Offensive

MbS' position strengthened last year when Western economies turned to Saudi Arabia to help tame an oil market destabilized by the war in Ukraine. It created the opportunity for MbS to launch a diplomatic offensive that included high profile summit appearances.

That effort was aided when Washington declared MbS immune from prosecution for Khashoggi's killing despite his being directly implicated in it by U.S. intelligence.

A visit by U.S. President Joe Biden last July had already demonstrated Riyadh's returning influence: The American leader left empty handed while the prince enjoyed a public display of U.S. commitment to Saudi security.

The Saudi pivot away from reliance on the United States was meanwhile evident when China mediated this year a settlement between Riyadh and its arch regional foe Iran after years of hostility.

The deal was not made from a position of Saudi strength: Iran's allies had come out stronger than those of the kingdom in Iraq, Syria and Lebanon, and held most of the populated territory in Yemen.

Still, it showed Riyadh was able to cut its losses and work with U.S. rivals and foes to shore up its regional interests such as cooling the Yemen war where Saudi forces have been bogged down since 2015.

Meanwhile the prince has improved ties with Turkey and ended a boycott of Qatar, a neighbour he considered invading in 2017 according to diplomats and Doha officials.

"Over the past three years, the hatchet was buried and relations were repaired," said Saudi columnist Abdulrahman Al-Rashed in Asharq Al-Awsat newspaper.

Transactional Relationship

A Gulf official said the new, more directly transactional, relationship with the United States had replaced the old oil-for-defence model because of what Riyadh saw as a shakier security umbrella after the Arab revolts of 2011.

A senior State Department official said the relationship is "an important eight-decade one that spans generations, across administrations in our own country and across leaders in Saudi Arabia".

"We have multiple interests when it comes to our relationship with Saudi Arabia...Our policy and engagement will seek to ensure that our relationship remains sound and able to meet our shared challenges of the future."

Riyadh thought Washington had abandoned old allies during the revolts and might abandon the Al Saud dynasty too. At the same time it believed the U.S. pursuit of a nuclear deal with Tehran had led Washington to ignore the growing activity around the region of Iranian proxies seen by Riyadh as a threat.

That impression has strengthened. A Saudi source close to the ruling inner circle pointed to what he saw as lax enforcement of sanctions on Iran and a drawdown in Syria, where a small U.S. contingent has denied territory to Iran's allies.

"I think countries in the region, as a consequence, will do what is best for them," he said.

Meanwhile, Riyadh was annoyed that the U.S. pulled its support for Saudi operations in Yemen, launched after Washington repeatedly urged the kingdom to take responsibility for its own security.

Without direct American intervention or support for its own military efforts, Riyadh had little choice but to strike a deal with Iran even if that annoyed Washington, the source said.

"This is a consequence of the U.S. action," he added.

Each side has a list of requests that the other is not willing to grant, the Gulf official said.

However, both sides may have little choice but to put aside their grudges.

The kingdom may see the U.S. security umbrella as weakened, but still views it as crucial to Saudi defence. Western states have meanwhile remembered that Riyadh's influence in a volatile oil market requires them to banish their qualms and deal with its de facto ruler and future king.

Source: Bdnews24

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Justin

Economic

Political

Looking for a prospectus for US Treasuries? Good luck, as it does not exist!

Treasuries are simply backed by the good faith of the US government. So there are no cross default provisions, meaning that if one bond is defaulted on it does not (necessarily) place the entire market into a state of default, where all bond holders would demand a simultaneous resolution. There is also no 30-day grace period, as is often typical in bond documentation. Basically, here, there is no “documentation”. So what would happen?

Fitch, having just moved the US to negative watch, have noted that it would move the security on which a payment has been missed from AAA to D (default), so a stand-alone default in that security. But Fitch also note it would severely downgrade all securities on which there is a payment due in the subsequent 30 days, the logic being they’d be up next for default. Bonds would move to CCC and bills would move to C.

A default on one security is a very low probability possibility (albeit not low enough for comfort). But a state of default that extended for 30 days is extraordinarily difficult, as over those 30 days the entire system is at risk of going down, and there would be a high probability attached to that. That said, to continue the analysis, likely there would be a rolling 30-day domino downgrade of securities into the C to CCC buckets as the state of default persisted.

Again, that would be the least of our concerns, as we would not have a system to talk about.

For now Bills are at risk of default. Treasuries are not, but will be at risk should we move past 15 June without a deal

So the question now is which securities are at immediate risk of default? And how big is the problem? The bipartisan policy center has revised the elevated “X-date risk range” to the period between 2 June to 13 June. There are some lumpy payments to be made through 1/2 June which could push us over the edge. And if we get beyond that, there is gauntlet to be run between then and the 15 June tax receipts deadline. If we get to 15 June without a hiccup, then the tax receipts push the X date well into the mid-to-late summer.

So, the period of immediate concern is from after 1 June to just before 15 June. The good news is no Treasuries are due either coupon or redemption payments through these dates, as payments on Treasuries are made either on a 15th of the month or on the last day of the month. So, for example, there are redemption and coupon payments due on Treasuries on 31 May. This also eats into cash, but the recent refunding also helps cover it.

The default focus therfore is on bills that redeem between 1 June and 13 June. There are four of them, due on the 1st, the 6th, the 8th and the 13th. The total amount due here is US$489bn. The US Treasury currently has some US$76bn in cash at the Fed, so you can see the problem here. The difference overstates the issue as the Treasury can still issue as part of its extraordinary measures. But still, to get through that period will require quite some jiggery pokery.

If there were a missed bills payment, the only way to right this would be for Congress to act quickly to suspend the debt ceiling. Recently, Kevin McCarthy, the Speaker of the House, said this could be done within 72 hours. If there was a default on 6 June, that could be too tight to make good on the 8 June payment. But a default on 1 June or 8 June would allow enough time to get a suitable bill passed, and presumably there would be some fast-tracking employed to boot.

Expect downgrades as we enter the early part of June without a deal. That's okay. A default would not be

There is a danger that even in the case of a default on one bond that the game of chicken continues. Maybe because the Fed acts quickly to take the defaulted bond out of circulation through an emergency bond buying measure, to protect the system. But this would be extremely dangerous, and could quickly unravel to undermine the dollar and the system. In all probability, a collapse in the Dow Jones would be enough for Capitol Hill to come to its senses and pass something to make this all go away.

But then what? S&P downgraded the US in 2011 to AA+, and it has been there since. Moody’s and Fitch have the US at AAA. Fitch have now moved to negative watch. One or more of them could downgrade the US even if there is no actual default. Uncontrolled spending and elevated deficits could be enough. But the elevation of a risk for a missed payment is the most obvious front-and-centre rationale.

A downgrade or two and no default would not be structurally problematic. It would be bad, but we’d move on. However, an actual missed payment on a security would leave a more lasting legacy.

First, a technical default would have happened. Fitch, for example, would attach an immediate 2-notch downgrade to this event alone. Second, most likely, there would be a downgrade in anticipation of default. So a 3-notch downgrade is probable should there be a default on one just one security, whether a bill or a bond. And importantly, this assumes defaulted upon holders are subsequently made whole.

That would move the US to low AA (as Fitch have intimated). It could be worse should there be remnants that point to more of this cropping up again in the near future. In either case, clearing houses and other counterparties that accept US Treasuries as collateral can act to reduce their implied value. That would be a really bad front-and-centre outcome (and potentially a legacy one). The sooner this ends in a good way the better.

Source:ING

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Justin

Economic

Central Bank

In what might have been the last rate hike of the current monetary policy tightening cycle, the Federal Reserve (Fed) raised interest rates to 5.125% on May 3. Through the cycle that began in March last year, the Fed has cumulatively raised rates by 500 basis points (bps), the largest since 1981. By early May, U.S. short-term interest rates were around 140 bps above long-term bond yields, making for the most extreme yield curve inversion since 1981.

The U.S. has the steepest yield curve inversion since 1981

If There is an Economic Downturn, When Will It Begin?_1

Yield curve inversions often precede economic downturns by one to two years (Figure 2). The size of the Fed tightening and the degree of the current yield curve inversion has left many wondering if the U.S. is heading toward a recession, and, if so, when it might begin? There are also expectations for the U.S. to avoid a recession, getting away instead with a “soft landing,” where the economy avoids a contraction but still slows down enough to allow inflation to subside, and for the Fed to ease policy.

History offers some guidance as to the probabilities of a downturn versus soft landing. Over the past 40 years, the Fed has taken the U.S. through six previous tightening cycles. Of those, four were followed by a recession, and two by soft landings (Figure 3). When recessions did happen, they began 10-17 months after the Fed’s last rate hike. The National Bureau of Economic Research (NBER) defines a recession as a “significant decline in economic activity.” This definition is more nuanced that the often cited but incorrect “two straight quarters of negative GDP growth.”

Shape of yield curve correlates positively with GDP growth 3-8 quarters in the future

If There is an Economic Downturn, When Will It Begin?_2

Among the recessions listed in the table above is the brief, but deep, downturn that began in February 2020. It was caused by the policy response to the COVID-19 pandemic, and we will never know if a normal cyclical downturn would have happened had the pandemic not occurred. Excluding the 2015-2018 tightening cycle from the analysis, Fed tightening cycles were followed by downturns only in three of the five cases. This suggests that the probability of a recession in the relatively near future might be as low as 60%.

However, there are several reasons to think that the risk of an economic downturn might be much higher. For starters, the Fed hiked rates by 500 bps in the past 14 months. This is far greater than in any previous tightening cycle since 1981. The 1981 tightening cycle, which was part of a broader period of tightening that began in 1979, resulted in the deepest recession since the Great Depression of the 1930s.

A second reason why the probability of a recession in the next two years might exceed 60% is the level of debt and leverage in the U.S. economy. Previous tightening cycles happened during periods of much lower levels of leverage. For example, the total debt-to-GDP ratio was around 130-135% at the time of the 1979 and 1981 tightening cycles. By the time of the 1984 tightening cycle, the ratio had risen to 150%. When the 1989 tightening cycle ended, it was 180%. By the May 2000 peak in Fed funds, it was 185%, and by the time the Fed stopped hiking rates in 2006, debt had risen to 217% of GDP. As of Q3 2022, the most recent quarter for which we have data, the total U.S. debt-to-GDP ratio was 257.5%. So not only does the size of the Fed’s current tightening cycle dwarf anything that it’s done in the past 40 years, the combination of public and private sector debt is also far larger than it was during past tightening cycles.

U.S. debt levels have risen steadily over the past few decades

If There is an Economic Downturn, When Will It Begin?_3

For the moment, the U.S. economy still appears to have decent forward momentum. Household incomes are growing strongly. Although the job market is cooling, unemployment remains low, job growth is still positive, and there are still nearly 9.6 million open positions as of the end of March. Even so, there are warning signs. Three regional banks collapsed in the past two months. If the Fed’s 500-bps of tightening slows growth further, default rates could eventually rise and banks might curtail lending further, creating the potential for a downward spiral in economic activity.

The Fed may have had an easier time engineering soft landings when debt was lower.

If There is an Economic Downturn, When Will It Begin?_4

Source:Erik Norland

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Justin

Central Bank

Economic

Income, spending and inflation remain too strong for the Fed to ignore

The April US personal income and spending report is a fair bit stronger than expected across the board, which will fuel talk of another Federal Reserve rate hike at either the June or July meetings. Incomes rose 0.4% month-on-month as expected, with wages and salaries up by 0.5%MoM, but spending rose by 0.8%MoM versus the 0.5% consensus with March revised higher. Consequently, we find real consumer spending came in at 0.5%MoM versus the 0.3% expected. This will inevitably lead to upward revisions of second-quarter GDP expectations given consumer spending is two-thirds of economic activity as measured by GDP.

We then turn to inflation, and the core PCE deflator has come in at 0.4%/4.7% rather than the 0.3%/4.6% expected. This move higher will inevitably boost the case of the Fed hawks such as James Bullard and Neel Kashkari that policy needs to move tighter to ensure inflation returns to the 2% target in a timely manner. We still think it will slow sharply in the second half of the year, but we are increasingly doubtful the Fed will have the patience to hold back from hiking, especially if the spending side is holding up as well as it seems. So, if we get a positive conclusion to the debt ceiling drama and next Friday's jobs number comes in at around 200k, we would have to say the odds will favour a 25bp hike in June.

Weakening pricing power points to sharp inflation falls later in the year

US Spending and Inflation Numbers Boost the Case for Another Rate Hike_1

But a turn is coming that will result in an eventual major reversal in Fed policy

The chart above shows how the rapid weakening of corporate pricing power (led by plummeting business sentiment) indicates we should expect inflation to slow sharply in the second half of the year – the problem is we aren't confident that the Fed will wait for it to happen. We fear that the likely result is we get over-tightening of monetary policy that, in combination with significantly tougher lending standards that will restrict the flow of credit, will tip the economy into what could be a painful recession. Our conclusion, therefore, is that this leads to an even greater interest rate cut story further down the line.