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
