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
