Key themes for the week ahead – US PCE Inflation data, Fed speak, and continued geopolitical headline risk
Recap from last week
We noted last week that ‘fed speak’ would be prominent in the lead-up to the next FOMC meeting. Over the next three weeks, the question remains: is the Fed preparing markets for more or less aggressive tightening?
The FOMC minutes noted that members “expected” that it would soon be appropriate to raise the target range. The probability of a Mar rate lift-off looks likely. Several members had favoured ending QE earlier than Mar to signal a stronger commitment to bringing down inflation – this did not happen. Inflation risks were seen as tilted to the upside. QT: “conditions would likely warrant” beginning to reduce the size of the balance sheet “sometime later this year”. Also noted was that “if inflation does not move down as expected, it would be appropriate for the committee to remove accommodation at a faster pace than they currently anticipate”.
Coming into last week, markets were pricing the possibility of a 50bps increase at the Mar meeting after the Jan CPI. Speeches through the week have dampened that idea for the moment – citing the risk of unduly tightening financial conditions. At the very least, markets are expecting a 25bps increase in the FFR target range at the Mar meeting. This is still a fluid situation and US inflation data this week will be another important input for the Mar meeting.
US data remained solid last week – especially the Jan retail sales result led by non-store and motor vehicle sales (although Dec was revised lower). US PPI also surprised to the upside (with little impact on markets).
The week ahead
Geopolitical headline risk remains heightened.
Fed speak will continue with FOMC members Governor Waller, Cleveland President Mester, and Governor Bowman speaking this week.
US PCE inflation data will be released this week – the FOMC preferred measure of inflation. Headline PCE inflation is expected to increase by +5.5% in Jan from +5.8% in Dec. Monthly PCE inflation is also expected to ease to +0.3% from +0.4% in Dec.
The global prelim PMIs for Feb will be released this week providing insight into the rebound in global growth.
The RBNZ will also meet this week and is expected to increase the official cash rate by 25bps to 1%.
The Aussie Wage Price Index for Q4 is expected to increase by +0.7% QoQ/+2.4% YoY. This would be above current RBA forecasts of +2.25% YoY. This will be an important data point for the RBA as it looks for evidence of a higher trend in wage and inflation growth over the next several quarterly wage and CPI releases as it considers the case for earlier rate hikes.
This week, the US Treasury will auction and settle approx. $297bn in ST Bills and 2-year FRN, raising approx. $28bn in new money. The US Treasury will also auction the 2-year, 5-year, and 7-year Notes this week which will settle on 28 Feb.
Approx. $21bn in ST Bills will mature on the Fed balance sheet this week and will be rolled over.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
