MCP Market Update: May 23rd, 2022 – Hanging on to equality
The Macro Outlook for w/c 23 May 2022
Key themes for the week ahead – global growth momentum, US PCE inflation, FOMC minutes, RBNZ, and ongoing geopolitical risk
Recap from last week
There was a hawkish tone from Fed Chair Powell last week. The FOMC needs to see inflation come down in a “clear and convincing way” and they are “going to keep pushing until we see that”. Prior signaling has been to lift rates ‘expeditiously’ to neutral, but Chair Powell noted that the Fed “wouldn’t hesitate” to move beyond “broadly understood levels of neutral” to achieve its aim of reducing inflation. Rate hikes of 50bps seem likely for Jun and Jul meetings if inflation remains high.
US data last week was mixed. Retail sales increased by more than expected in Apr and the prior month was revised higher. Quarterly retail results caused concern about a slowdown, inventory levels, and staffing. Initial claims shifted above the 200k mark. The housing market continued to slow amid the rising rate environment. Within industrial production data, manufacturing output continued to increase at a constant pace. Manufacturing capacity utilization at 79.45% is almost back up to the prior series high going back to the start of 2006. Headline regional manufacturing surveys suggested slower growth momentum coming into May – with demand data mixed. Growth in lead times remained constant, price increases were widespread, and employment growth was broadly stable.
UK inflation accelerated to 9% in Apr from 7% in Mar and the 3mth unemployment rate came in lower at 3.7%. The BoE Governor will speak this week. CPI growth in Canada came in higher than expected at +6.8% in Apr.
The National CPI growth for Japan was also higher than expected at +2.4% in Apr, up from +1.2% in Mar. Core measures were similarly higher. The main contributor to the acceleration was cycling over to a lower base in 2021 communications prices.
The RBA minutes confirmed that the condition for a rate increase had been met. The Board debated the size of the rate increase, settling on 25bps to signal a “return to normal operating procedure” from extraordinary policy settings. The Q1 wage price growth was slightly lower than expected meaning real wages declined. Labour market data was mixed. Employment growth was weak but a fall in participation resulted in a decline in the unemployment rate to 3.9%.
In an interview last week, ECB President Lagarde (among other recent ECB speeches), suggested that the ECB may hike rates “within weeks” of ending the Net Asset Purchase Program (expected to end early in Q3).
Outlook for the week ahead
US PCE inflation result for Apr – the Fed preferred measure. Headline inflation is expected to be unchanged at +6.6% over the year to Apr and increase by +0.8% in the month. Core PCE inflation is expected to moderate to +4.6%.
The FOMC minutes for the May meeting will provide insight behind the decision to increase by 50bps and begin balance sheet run-off. Speeches since that meeting have reiterated the aim of policy to reduce inflation.
The prelim global PMIs for May will provide early insight into changes in growth momentum amid rising growth concerns. Global growth forecasts have been downgraded as inflation, the war in Ukraine, and shutdowns in China are forecast to affect demand and further disrupt supply chains.
The RBNZ will meet this week and is expected to increase rates again, possibly by another 50bps.
Fed speakers this week include pre-recorded remarks from Chair Powell. The World Economic Forum at Davos will run all week.
This week, the US Treasury will auction and settle approx. $204bn in ST Bills and 2yr FRNs, with an approx. paydown of $12bn.
The US Treasury will also auction the remainder of next week’s issuance – the 2yr, 5yr, and 7yr Notes. All will settle next week on 31 May.
Approx. $17bn 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
The Macro Outlook for w/c 16 May 2022
Key themes for the week ahead – inflation, US retail sales, central bank speeches & minutes, and ongoing geopolitical risk
Recap from last week
US CPI for Apr and Fed speeches was the focus of last week. US CPI growth did ease to +8.3% in Apr from +8.5% in Mar but not by as much as expected (expecting +8.1%). The rate of growth is still extremely elevated. The deceleration in Apr was the result of slower growth in energy (gasoline) and used car prices. Household energy prices, food, and shelter price growth continued to accelerate. US consumer sentiment declined markedly again amid high inflation concerns.
Fed speeches reiterated the priority to deal with high inflation by moving to neutral as quickly as possible. This means increases of 50bps are likely at Jun and Jul meetings. The more hawkish speeches called for an even greater tightening of financial conditions. According to Fed Chair Powell, the FOMC is not actively considering 75bps increases but is prepared to do more (or less) if needed.
Chair Powell’s interview after the CPI release noted that their “ability to execute a soft landing depends on factors outside of its control” – namely geopolitics and supply chain bottlenecks, both of which remain issues. Growth concerns have become heightened since the invasion of Ukraine. Some US growth forecasts have recently been revised even lower than the FOMC SEP from Mar when 2022 growth was revised from 4% down to 2.8% (without a corresponding increase in the unemployment rate).
The week ahead
A big week of data affecting the growth and inflation outlook and the path for rates.
US retail sales this week are expected to increase by +0.8% in Apr from +0.7% in Mar. The Apr US housing data is expected to weaken slightly on rising mortgage rates. Speeches this week by Fed Chair Powell, Bullard, and Mester. Initial manufacturing surveys for May to provide early insight into output growth momentum, prices, employment, and supply chain impact, especially from the latest Chinese lockdowns.
Both the BoC and BoE have guided higher for rates on the back of elevated inflation. This week, Canadian CPI is expected to ease to +6.3% in Apr (from +6.7% in Mar) while UK CPI is expected to accelerate from 7% in Mar to +9.1% in Apr. UK labour market (Mar) and retail sales (Apr) data will also provide some important insight into the pace of economic activity. Last week, UK Q1 GDP was slightly lower than expected at +0.8% (expecting +1%).
Japanese national CPI growth is expected to increase to +1.5% in Apr up from +1.2% in Mar. Core CPI ex fresh food is expected to increase to +2.1% in Apr (from +0.8% in Mar) on the back of higher energy prices. Ex energy and fresh food prices, CPI is expected to decline by -0.9% over the year in Apr. The BoJ has stated that it expects inflation to reach above 2% but will ‘look through’ rising energy prices which it expects to be transitory. Japanese GDP in Q1 is expected to contract by -0.4%.
The RBA minutes should provide insight behind the May rate hike. The RBA will watch closely the labour market and wages releases this week. Expecting a +30k increase in employment and the unemployment rate to fall to 3.9%. Wages in Q1 are expected to increase by +0.8% in the quarter and by +2.5% over the year. Last week, Aussie consumer sentiment fell further on rising inflation and interest rates impacting the cost of living. The Australian Federal election will be held this weekend.
The ECB minutes will be released this week. Markets are continuing to forecast rate lift-off after QE ends, possibly from Jul. Final Apr Euro area CPI for Apr is expected to confirm Euro area inflation at +7.5%. ECB President Lagarde and numerous other ECB members will speak this week.
Chinese data for Apr continues to reflect weaker economic conditions amid strict covid-zero lockdowns.
G7 leaders meet this week.
This week, the US Treasury will auction and settle approx. $319bn in ST Bills, Notes, and Bonds raising approx. $16bn in new money.
The US Treasury will also auction the 20yr Bond and 10yr TIPS this week – both will settle on 31 May.
Approx. $97bn in ST Bills, Notes, and Bonds 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
MCP Market Update: May 16th, 2022 – Minimum targets met
