by Kim | May 9, 2022
Key themes for the week ahead – US CPI, central bank speeches, and ongoing geopolitical risk
Recap from last week
The FOMC, RBA, and BoE increased rates to curb inflation, announced balance sheet reduction, and guided higher for the likely path of rates.
The FOMC increased the target FFR by 50bps to 0.75-1%. Quantitative tightening will begin in Jun with a cap of $30bn/mth in balance sheet run-off for the first three months, then increasing to $60bn/mth. Chair Powell noted that “we are on a path to move our policy rate expeditiously to more normal levels” and that “additional 50bps increases should be on the table at the next couple of meetings” – assuming markets evolve as expected.
Chair Powell said that underlying growth in the US economy remained strong. The decline in Q1 GDP “reflecting swings in inventories and net exports, two volatile categories” that “likely carry little signal for future growth”. The Apr US ISM PMIs recorded slightly slower growth momentum as firms noted ongoing supply challenges and difficulty in finding qualified staff. Higher prices were a major theme as the number of firms reporting higher prices remained extremely elevated and the services sector recorded a new series high in the price index. US labour market indicators were somewhat mixed. Non-farm payrolls increased more than expected by +428k while Feb and Mar were revised lower by 40k. The unemployment rate was unchanged at 3.6%, as a fall in participation helped to offset a decline in employment in the household (population) survey.
The RBA surprised markets with a 25bps increase in the cash rate target to 0.35% (expecting +15bps). The RBA announced that bond holdings and the size of the balance sheet will decline as bonds mature (no reinvestments) – with substantial declines in the balance sheet expected during 2023/4. While rates are not on a preset path, it is expected that further increases in interest rates will be necessary.
The BoE increased rates by a further 25bps in a 6-3 decision, with three members voting for a 50bps increase. The decision highlighted that inflation pressures have “intensified sharply” – “leading to a material deterioration in the outlook for the world and UK growth”. The BoE central inflation forecast has UK CPI peaking in Q4 this year and averaging over 10%. The decision was accompanied by a weaker outlook for growth and rising unemployment. A plan for the outright sale of bond holdings will be presented at the Aug meeting for implementation at a later meeting. The committee noted that “some degree of further tightening in monetary policy may still be appropriate in the coming months”. The UK Q1 GDP is out this week and growth is expected to be +1% for Q1 and +9% over the year.
The week ahead
The US CPI for Apr will be the focus for the week – with growth in consumer prices expected to ease. The headline CPI growth is expected to slow to +8.1% in Apr from +8.5% in Mar. The monthly CPI is expected to ease from +1.2% in Mar to +0.2% in Apr. Core CPI is expected to increase by 6% in Apr, down from +6.5% in Mar. The monthly core CPI is expected to increase by +0.4% in Apr versus +0.3% in Mar.
Central bank speeches will come into focus over the next few weeks. We are watching for: US signaling on a change in the pace/size of rate increases (also a function of the inflation result) and ECB signaling on the path of rates.
This week, the US Treasury will auction and settle approx. $182bn in ST Bills with a further -$36bn paydown.
The US Treasury will auction $103bn in 3yr and 10yr Notes and the 30yr Bond this week which will settle next week.
Approx. $18bn 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
by Mars Capital Partners | May 9, 2022
Last week, equities extended lower in what is likely to be a larger degree wave C or 3 impulsive decline. Despite markets being oversold, there is an immediate risk of an accelerated wave (iii) of 3 decline on a clear break of last week's lows. Markets are beginning to embrace the stagflationary outlook with high […]
by Kim | May 2, 2022
Key events for the week ahead – FOMC, BoE, and RBA meetings, US non-farm payrolls, and ongoing geopolitical risk
Recap from last week
US Q1 real GDP surprised to the downside due to a notable contraction in net exports. US goods exports declined while import demand remained elevated for the quarter. This more than offset the faster growth in personal consumption and investment expenditure. Inventories and government expenditures both detracted from growth. US PCE inflation accelerated to +6.6% in Mar, up from +6.4% in Feb with monthly inflation increasing to +0.87%. Core PCE inflation remained high at +5.2% but lower than the +5.3% print in Feb, as we start to cycle over the higher base from a year ago. Monthly core PCE price growth remained at +0.3%.
Aussie inflation was higher than expected. CPI growth in Q1 was +5.1% (prior was +3.5%). Inflation was broadly based. The headline and core measures are now above the RBA’s upper band of 3%.
The Euro-area prelim GDP growth for Q1 remained muted, but positive at +0.2%. At the same time, Euro-area inflation increased by +7.5% in Apr, up from +7.4% in Mar. Monthly CPI growth eased to +0.6% as energy prices declined by -3.7%. This illustrates the lower growth and high inflation policy challenge for the ECB.
The BoJ remained firmly dovish. It announced it would step in to buy 10yr JGBs “every business day” at 0.25% to support the zero-target rate. Inflation is still below 2% and risks to growth are to the downside. This is a firm stake in the ground from the BoJ and its forecasts show that an easing bias is not likely over the medium term.
Chinese PMIs recorded a sharp contraction in both manufacturing and services activity for Apr as a strict zero-covid policy is still in place. This is expected to have a further impact on global supply chains and poses a risk to growth for many countries.
The week ahead
This is another week of significant central bank meetings and data for markets to digest.
The FOMC is expected to raise rates by 50bps this week and announce the details of QT. We’ll be looking for guidance on the path to the ‘neutral’ rate at subsequent meetings and views on the tightening in financial conditions, the expected slowdown in inflation, and the growth outlook. The US Treasury will also release its quarterly refunding requirements on 4 May.
US non-farm payrolls are expected to increase by +380k in Apr. Participation is expected to be unchanged while the unemployment rate is expected to fall to 3.5%. The ISM PMIs for Apr are expected to show slightly faster growth momentum than in Mar.
The RBA will meet on policy this week. Given the higher-than-expected CPI and the strong labour market, the RBA Board is expected to increase rates by 15bps this week (some estimates indicate 40bps). But note that the RBA has been hesitant (in the past) to make a major policy change in front of a federal election (which will be 21 May). The Board only just changed its forward guidance (removing “can afford to be patient”) at the last meeting and indicated that it would look at data “over the coming months”, which may include another quarter of the consumer and wage price index.
BoE will meet this week and a further 25bps increase is expected.
Final global PMIs for Apr will be released this week. The prelim reports had highlighted a continued record pace of input and/or output price growth across most countries in Apr.
This week, the US Treasury will auction and settle approx. $363bn in ST Bills, Notes, Bonds, and FRNs, with another -$7bn paydown.
Approx. $47bn in ST Bills, Notes, Bonds, and FRNs 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
by Mars Capital Partners | May 2, 2022
Last week, US equities declined impulsively for a hard test of recent swing lows. The Nasdaq and Russell made new cycle lows while the SPX and DJIA are yet to confirm new lows. The decline appears incomplete and the bear trend remains intact but equities may be completing small degree 5th waves in the near […]
