Key events for the week ahead – US non-farm payrolls, FOMC & ECB minutes, RBA policy decision
Recap from last week
At the ECB Forum at Sintra last week, central bankers agreed that we aren’t returning to a ‘lowflation’ world. While Inflation may come down from these peaks, it could stay elevated compared to before the pandemic – and this has implications for monetary policy settings. Central bankers also felt there was urgency in tightening to ensure inflation does not become entrenched. Whilst Chair Powell thought there was a risk of “going too far” with tightening and risking a recession, in fact, “the bigger mistake to make, let’s put it that way, would be to fail to restore price stability.” (US Fed Chair Powell).
But will these central banks maintain this hawkishness if growth does slow in a meaningful way? In Europe, the Euro area flash CPI for Jun continued to accelerate to a record +8.6% but the flash PMIs for Jun suggests a slowdown in manufacturing and services momentum plus weak sentiment. The ECB has yet to even start raising rates (although conditions are tightening). There is still a considerable downside risk to growth in the Euro area from a further escalation with Russia/Ukraine and energy policy.
The BoE is not seen as behind the curve. The UK economy is “at a turning point” and showing signs of slowing while the inflation rate remains at an extreme +9.1%. The BoE Governor noted at Sintra that it would act more forcefully if inflation remained persistent, but hinted that raising the policy rate was not the only option.
Finally, the FOMC has been tightening more aggressively. The PCE inflation rate increased at a constant pace of 6.3% in May (+6.3% in Apr), but the Atlanta Fed trimmed mean still shows inflation broadening across categories. There are signs of easing pressure from energy and other commodity prices, which may be reflected in upcoming inflation reports. But US manufacturing, services, and housing data are fuelling growth concerns. US regional manufacturing surveys for Jun recorded a notable slowdown in orders over the last two months. Firms are instead working through backlogs and tight inventories are starting to ease. The ISM manufacturing report for Jun also reported a slight contraction in orders as well as a further, moderate contraction in employment.
Outlook for the week ahead
During his FOMC press conference in Jun, Chair Powell said that the “objective is to bring inflation down to 2% while the labour market remains strong”. The labour markets will remain a key barometer for the central banks and for the pace of tightening in the near term.
This week, the focus will be on US non-farm payrolls for Jun. Initial claims over the last few weeks have remained steady, albeit slightly elevated. Non-farm payrolls are expected to increase by +270k in Jun (+390k in May). Participation is expected to be little changed at 62.3% and the unemployment rate is expected to remain at an extremely low 3.6%.
The FOMC and ECB minutes from the prior meetings will be released this week.
The RBA will meet on policy this week. Governor Lowe noted that the discussion will likely focus on a 25 or 50bps increase in the cash rate target. Markets are expecting another 50bps increase. The labour market remains strong, while there is some evidence of the housing market starting to slow.
The final global PMIs for Jun will continue to be released this week. Also, Germany’s factory orders and industrial production data for May will be an important gauge of activity in the Euro area.
This week, the US Treasury will auction and settle approx. $182bn in ST Bills, with an estimated paydown of $26bn.
Approx. $20bn 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
