There was a famous scene in Godfather 2 when Frank Pentangeli heads to Congress to give testimony as a witness against Michael Corleone. Frank was an old associate of Michael’s father Vito in the olive oil business, among other things, and was ready to spill the beans on Michael as head of one of the biggest crime families. But, at the committee hearing, after seeing his brother in the room sitting next to Michael, he all of a sudden denied all knowledge of any Godfather or organized crime activity that he was accused of being involved in. “I never knew no Godfather. I got my own family, Senator” Frank said. Here’s the scene, //www.youtube.com/watch?v=3FeMvQR-0VA.
What reminds me of this movie clip was Jay Powell’s testimony over the past two days. When asked multiple times about the influence of the enormous fiscal spending over the past few years on the current inflation we are now seeing he completely clammed up. He didn’t want to talk about it, it wasn’t his purview he said, that was something for Congress itself to debate. To use one example, the article in the Financial Times on October 11th, 2020 was titled “Fed’s Powell is chief cheerleader for fiscal stimulus.” //www.ft.com/content/91322629-0668-49b5-aba0-13bd72b436e8. The first paragraph of the article said “Jay Powell has mounted an increasingly forceful case for more fiscal stimulus in the US economy, sending a clear yet politically tricky message to Congress and the White House that the recovery could be in danger of faltering.” This of course was followed by another enormous spending plan in December 2020 under Trump and then Biden’s $1.9 Trillion largesse in March 2021 which Powell also was supportive of. Powell said in February 2021 to the Senate Banking Committee when talking about all this spending, “I really do not expect we’ll be in a situation where inflation rises to troublesome levels.” The WSJ’s op-ed in the week before the FT article said “The Chairman is taking the Fed into unchartered waters, and the toast of the town one day can become the scapegoat the next.” That time has come.
The question to Jay Powell this past Wednesday was “Do you believe that the $1.9 Trillion spending package last year had any effect on inflation?” His Frank Pentangeli answer, “It’s really not our job to pass judgment.”
Now that Powell is the well deserved scapegoat and one of the culprits for inflation, him now not talking about the huge influence fiscal spending had on inflation that was financed by himself, we are not going to get an honest discussion in Washington, DC on what were the causes. Those that don’t want to take responsibility are saying it’s a global phenomenon and therefore it’s not domestic policy at fault but as we should know, central banks around the world all conducted the same aggressive policy that has resulted in housing bubbles everywhere among other inflationary impacts. Many also conducted the same anti fossil fuels policy that is directly responsible for high energy prices, not Putin. So yes, inflation is global but in response to common bad government policies.
Moving on. Here were some notable quotables from the Fed Ex conference call last night, a stock we own. ” Now, let take a moment to discuss 2023. We anticipate consumers will keep spending and their spending will continue tilting towards services from goods. We expect more consumers to return to stores. With this backdrop, we do expect pressure on B2C volumes. Through May industrial activity has been solid but today’s June flash PMI was a sharp decline. Further, after a strong build late last year and early this year inventory restocking is slowing. This will dampen freight demand. Our international businesses continue to navigate a dynamic environment. Global trade growth has slowed from disruptions related to lock downs in China and the conflict in Ukraine limiting the flow of goods and reducing international export volumes. We do anticipate supply chain disruptions throughout the fiscal year.”
BoJ Governor Kuroda got his 2% inflation wish for a 2nd straight month in May as Japan’s CPI headline rose 2.5% and ex food was up by 2.1% after a similar gain in April. The BoJ 2% inflation target is just ex food. If we take out both food and energy though, prices were up .8% y/o/y for a 2nd month and just one tenth from matching a 6 yr high. As the numbers were in line with expectations, there was little change in the 10 yr inflation breakeven. The 10 yr JGB yield was down just under 1 bp to .23% but the 40 yr was up 1.5 bps to 1.33%. The yen is weaker and back above 135 while the Nikkei rallied with everyone else.
Japan’s CPI ex food
The German June IFO business confidence index fell to 92.3 from 93 and that was less than the 92.8 that was expected. The Expectations component was down 1.1 pts and the Current Assessment declined by .3 pts m/o/m. The IFO said succinctly, “The threat of gas shortages is of great concern to the German economy,” as it should be. After a sharp drop in yields over the past 2 days with the global bond rally, the German 10 yr yield is up 6 bps today at 1.49%. It started the week at 1.66%. On those European natural gas prices, they are up for the 10th straight day today and by 58% in this time frame.
German IFO
Italy reported a surprising rise in its June Economic Sentiment Index to 113.6 from 111 in May. A lot of this is the freedom of the post covid world as the services component jumped 5.3 pts which in turn helped retailers confidence. Manufacturing and construction confidence was up too. Separately though Italian consumer confidence fell to the lowest level since November 2020. The Italian 10 yr yield spread to the German 10 yr bund yield stands at 199 bps vs 194 bps last Friday but off the 242 early last week.
Reflecting the strain of falling real wages, UK retail sales ex auto fuel in May fell .7% m/o/m and 5.7% y/o/y. If we include the downward revision to April, it was below expectations. Gilt yields though are higher too after the 2 day rally and the pound is bouncing. This data point follows the UK consumer confidence seen last night for June that was little changed at -41 from -40 last month but that is a new record low.
UK Consumer Confidence