by Kim | Jul 31, 2022
Key events for the week ahead – Global PMIs for Jul, BoE and RBA decisions, and US non-farm payrolls
The FOMC raised the FFR target by 75bps to 2.25%-2.5%. The FOMC has followed its plan to increase rates ‘expeditiously’ to the ‘neutral’ rate. In a highly contentious statement, Chair Powell said that the neutral level had probably been reached after the Jul hike. The Fed will take a measured approach to the next rate increases, as the FFR likely starts to increase into more restrictive territory. Some saw this decision as a pivot, especially compared to the overtly hawkish tone in the Jun meeting (after the May CPI shock when the Fed was seen as behind the curve and notably upped its hawkish rhetoric). Still, the FOMC stated that another ‘unusually large’ hike could be appropriate, depending on the data. At the very least, ongoing increases are still appropriate.
The FOMC acknowledged a willingness to accept a period of ‘below-trend’ growth in the short term to achieve lower inflation over the long term. Soft demand isn’t going to get the Fed to pivot unless there is a material deterioration in the labour market. And inflation is yet to fall – although easing in inflation is expected now that energy/commodity prices have fallen from recent peaks. With greater data uncertainty, FOMC guidance has been reduced. We continue to focus on Fed speak/signaling, inflation, labour market indicators, and broader growth momentum going into the next meeting.
US data last week showed another decline in Q2 GDP (advance release). The slowdown was more broad-based than the decline in Q1. The PCE inflation for Jun though, surprised to the upside with a strong increase in the month of +1% (up from +0.6% in May) and the annual rate increasing to +6.8% from +6.3% in May.
US data this week will provide a good overview of the US labour market. Non-farm payrolls for Jul are expected to increase at a slower pace of +250k. The unemployment rate is expected to remain at 3.6% with little/no change in participation at 62.2%. Initial claims will be watched closely – which were revised higher in prior weeks and is now up to +250k/week. JOLTS data for Jun will also be released. On the growth front, the ISM surveys for Jul will be in focus – especially after the weaker flash US PMIs (output). Regional manufacturing surveys in Jul have been mostly stable after the deterioration in Jun, but there are pockets of weakness.
It was mixed news for the ECB with faster growth in Q2 but higher inflation. Euro area Q2 GDP growth surprised to the upside, increasing by +0.7% (expecting +0.1%) versus +0.5% in Q1. But Germany’s GDP growth slowed to 0% in Q2. The Euro area flash inflation for Jul was higher than expected at +8.9% (expecting +8.7%) versus +8.6% in Jun. But the monthly growth slowed notably to +0.1%. Similarly, Euro area core CPI accelerated to +4% from +3.7% in Jun, but the monthly pace declined by -0.2%. This week, a further read on growth momentum from the Jul PMIs, retail sales, and Germany factory orders and industrial production.
The BoE is expected to increase rates by a further 25bps this week. UK inflation is still elevated at +9.4% in Jun having accelerated from +9.1% in May.
The RBA is expected to increase rates by a further 50bps this week. Headline CPI came in slightly lower than expected at +6.1% (expecting +6.3%), but still higher than the +5.1% inflation recorded in Q1. Measures of core CPI also accelerated to over 4% and well above the target band of 2-3% inflation. Aus economic activity and the labour market have remained resilient, while there have been some signs of softening in the housing market. The RBA is expected to release its latest inflation forecasts in the Statement on Monetary Policy.
This week, the US Treasury will auction and settle approx. $398bn in ST Bills, Notes, Bonds, and FRNs raising approx. $47bn in new money. Approx. $21bn in ST Bills will mature on the Fed balance sheet this week and will be rolled over.
The revised US Treasury Q3 refunding schedule and the estimate for Q4 will be released this week on 3 August 2022. Overall financing estimates will be released on 1 August 2022.
Quantitative Tightening Overview – August 2022
This is the final month of the lower $30bn cap on the decline in Treasury Securities on the Fed balance sheet. This cap increases to $60bn in September.
Approx. $111.4bn in SOMA Coupons will mature this month (15 and 31 Aug). Of the $111.4bn, a total of $30bn (the cap) will be redeemed and the remaining $81.4bn in maturing Coupons will be reinvested. Given that the value of Coupons maturing is greater than the redemption cap this month, Bills maturing in August will be rolled over/reinvested.
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 | Jul 31, 2022
NB: Unfortunately, I will be taking leave for the next two weeks as I undergo a hip operation. Apologies in advance for the inconvenience but I'll be back on deck as soon as practical. Equities broke unexpectedly higher last week to invalidate our near term bear count. The ES COT data had warned of overloaded […]
by Kim | Jul 25, 2022
Key events for the week ahead – FOMC monetary policy decision, US and Euro area Q2 GDP growth, and inflation data
Recap from last week
There were several notable parts of the ECB decision last week. The ECB increased its key interest rates more than expected by 50bps, to ‘front-load’ increases, and noted that further normalization of monetary conditions would be appropriate given the updated inflation assessment. The ECB announced its ‘anti-fragmentation tool’ the Transmission Protection Instrument. Given the highly uncertain geopolitical environment, the ECB also announced a ‘transition to a meeting-by-meeting approach to interest rate decisions’, effectively halting forward guidance. The ECB noted that activity is slowing in the Eurozone, due to both the invasion of Ukraine and high inflation impacting demand.
The Jul flash PMIs showed a continued broad-based slowdown in growth momentum, including slower order growth and declines in export orders. Services output growth slowed across all markets. Manufacturing output contracted across most markets, except Australia, and contracted more notably in the Euro area (led by Germany). In Germany, finished goods inventory increased at a near record rate highlighting the scale of the slowdown in demand.
The contraction in the US services PMI output component was notable, falling by -5.7pts. New export orders also contracted. This is roughly in line with the weakening conditions in the housing market with continued declines in mortgage applications, substantial falls in existing home sales for Jun, and weaker housing market conditions in Jul. The US flash manufacturing PMI for Jul showed contracting demand and flat output growth as firms worked through backlogs in the absence of higher demand. The other important development has been the small, but consistent increase in initial jobless claims, now up to +251k as of last week.
Outlook for the week ahead
In the US, the FOMC is expected to increase rates by another 75bps this week bringing the FFR target to 2.5%. We’ll be looking for how signaling might shift as the FFR reaches 2.5% (around the “neutral rate”). Will the FOMC start to signal smaller hikes? Does the FOMC start to show a degree of sensitivity to slower growth and/or easing inflation?
US data this week should provide a further guide on the growth momentum. A key focus will be on the high-frequency initial jobless claims data (expecting around +250k). GDP in Q2 (prelim) is expected to grow by +0.4% on a SAAR-basis, up from -1.6% in Q1 (Q1 GDP showed more resilient private sector demand, but fell due to the change in inventories and net exports). The PCE price inflation data for Jun is expected to show little change from the +6.3% increase in May. Other data includes personal income and spending for Jun, durable goods orders for Jun, consumer sentiment for Jul, and more regional manufacturing surveys for Jul.
Euro area data this week will also provide a guide on growth and inflation momentum. The prelim Q2 GDP for the Euro area (and country-level data) will be released. Euro area growth is expected to slow from +0.6% in Q1 to +0.1% in Q2. The prelim Euro area CPI data for Jul will also be released (including country-level inflation data). The Euro area CPI is expected to accelerate slightly to +8.7% in Jul from +8.6% in Jun.
Finally, important Q2 CPI data for Australia will be released – a timely update for the RBA board meeting next week when a further hike in interest rates is expected. Annual CPI is expected to accelerate to +6.3% in Q2 up from +5.1% in Q1. The QoQ increase is expected to slow to +1.9% in Q2 from +2.1% in Q2.
This week, the US Treasury will auction and settle approx. $248bn in ST Bills and 10yr TIPS raising approx. $51bn in new money. The US Treasury will also auction the 2yr, 5yr, and 7yr Notes and the 2yr FRN this week and will settle early next week.
Approx. $24bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be rolled over. Approx. $16bn in Notes and Bonds (making up the remainder of the monthly $30bn cap) will mature and roll off the Fed balance sheet.
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 | Jul 25, 2022
Equities rallied last week for what we expect to be wave (c) of a corrective advance. There are enough waves in place to complete this near term counter-trend rally and the onus is on the bears to make a stand here. The question is whether this rally completed all of red uber bear (ii) or […]
by Kim | Jul 18, 2022
Key events for the week ahead – ECB & BoJ policy decisions, RBA Minutes, inflation reports, and prelim PMIs for July
Recap from last week
US CPI accelerated more than expected to +9.1% for Jun. Fed speeches and market reactions indicate that at least another 75bps hike is expected by the FOMC next week. There is a sense that the Jun CPI report marks a near-term peak in the pace of headline inflation given the easing in energy and commodity prices. But measures of core inflation (trimmed and median) and sticky CPI suggest that inflation pressure is still broadening and may take longer for it to peak. Even if headline inflation growth slows, it may take longer for core inflation to return to target levels.
US retail spending for Jun came in better than expected at +1% (still slightly negative in real terms), and consumer sentiment was little changed from Jun. The weakness in Jun US manufacturing from the regional and PMI reports was reflected in the -0.5% decline in manufacturing output in Jun. Both durable and non-durable goods output declined.
Continued high inflation had central banks announcing larger rate hikes last week. The BoC surprised with a 100bps increase in the target overnight rate to 2.5%, citing higher and more persistent inflation than expected. The BoC expects inflation to stay around 8% for the next few months. This week, the Jun CPI for Canada is expected to increase to +8.3% (from +7.7% in May).
The RBNZ also lifted the official cash rate by a further 75bps last week to 2.5%. The bank noted near-term upside inflation risks, supported by a tight labour market (3.2% unemployment rate). This week, NZ Q2 CPI came in higher than expected at +7.3% for Jun.
Outlook for the week ahead
There will be more central bank activity this week.
The BoJ will meet on monetary policy, but no policy change is expected. The BoJ is expected to update its inflation outlook. The Japanese National CPI for Jun will be released this week. Core inflation (ex-fresh food) is expected to stay elevated at +2.2% (from +2.1% in May).
The ECB is expected to increase its key rates by 25bps. The net asset purchases ended on 1 July. So far, inflation has continued to increase at an elevated pace. Sentiment is weakening and there are signs of slowing growth momentum, especially in periphery countries. Generally, markets are expecting a short hiking cycle.
The RBA minutes will be released this week. The RBA raised the cash rate target by another 50bps to 1.35% at the Jul meeting. Last week’s Jun labour market report reflected a further tightening in conditions – high employment growth, a new high in participation, and a near-term record low unemployment rate of 3.5%. This will give the RBA confidence to continue hiking rates. This week, Governor Lowe will speak, and Asst Governor Bullock will also speak about how Aus households are placed for interest rate increases. Next week, the Q2 CPI report will be released – in time for the Aug meeting the following week.
UK CPI for Jun is expected to increase further by +9.3% (versus +9.1% in May).
The prelim S&P PMIs for Jul will be released this week. There was a notable slowdown in Jun, especially in US manufacturing and across the Eurozone. The Jul reports are expected to show little change in momentum from Jun.
There will be no Fed-speak this week in the blackout period ahead of the FOMC meeting next week.
This week, the US Treasury will auction and settle approx. $211bn in ST Bills raising approx. $3bn in new money.
The US Treasury will also auction the 10yr TIPS and the 20yr Bond this week.
Approx. $19bn 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
