The Macro Outlook for w/c 11 July 2022
Key events for the week ahead – US CPI & retail sales, RBNZ & BoC policy decisions, and US Q2 earnings
Recap from last week
The pace of inflation, the strength of the labour market, and growth remain key barometers for central banks in this tightening cycle. The FOMC minutes reflected the hawkish tilt at the June meeting following the May CPI report. A key change was the shift from ‘expeditiously to neutral’ to restrictive policy, and, possibly to an ‘even more restrictive stance’ if elevated inflation pressure persists. At this stage, it’s likely the FOMC will raise the FFR target by another 75bps at the Jul meeting. Since the last meeting and CPI report, the market narrative has shifted to growth and recession concerns if the Fed maintains this hawkish angle. The FOMC has done little to dampen this narrative.
US labour force data continued to confirm robust conditions for May and Jun. Non-farm payrolls for Jun were higher than expected at +372k, but with -72k revisions for the two prior months.
The US labour market started the year on a strong note, but the pace of momentum has eased since Mar. This is evident across slower (yet still high) payroll and household employment growth and a slightly rising trend in initial jobless claims since Mar. The peak (so far) in job openings was in Mar, the peak in hires was in Feb, and quits peaked back in Nov 2021. US layoffs and discharges reached a low in Dec 2021.
The US ISM reports highlight slower growth momentum since late 2021 also. Manufacturing conditions eased more notably by Jun – especially new orders (confirmed by the S&P PMI and regional surveys). The ISM services momentum also eased, but the headline expansion remains at the average 2019 pre-pandemic level. There is some sign of slowing services new orders/demand growth (especially in the US S&P Services PMI).
Global S&P PMIs for Jun was stronger – led by broader expansion from the reopening of China. Ex China highlights slower growth momentum in manufacturing – led by the Eurozone (including Germany) and the US. Eurozone services also slowed notably. The PMIs summarise the different headwinds facing many nations; including the roll-off of significant covid-era stimulus, high inflation impacting consumption, a war on the doorstep of Europe, an energy crisis, and rising rates.
Outlook for the week ahead
There are several important US reports out this week in the lead-up to the Jul FOMC meeting. The first is US CPI. Inflation is expected to accelerate to +8.8% for the year (expectations for up to +9%), up from +8.6% in May. Monthly CPI is also expected to remain high at +1.1% in Jun (versus +1% in May). Core CPI is expected to increase at a constant +0.6% for the month and +5.8% for the year, down from +6% in May.
The second is US retail sales growth, which is expected to rebound to +0.8% in Jun after a fall in nominal sales in May of -0.3%.
RBNZ monetary policy decision – markets are expecting a 50bps increase.
BoC monetary policy decision – and the expectation is for a 75bps increase. Headline CPI in Canada remains elevated. The employment decline in Jun was offset by a fall in participation, so the unemployment rate fell to 4.9%. Wage growth was stronger than expected.
Aus labour market report for Jun will be another important barometer for the RBA. Employment growth is expected to slow but the unemployment rate is also expected to fall to a record 3.8%.
The highly anticipated US Q2 earnings reports will commence later this week.
The US Treasury will auction and settle approx. $317bn in ST Bills, Notes, and Bonds raising approx. $10bn in new money this week.
Approx. $36bn in ST Bills, Notes, Bonds, and TIPS (incl compensation) will mature on the Fed balance sheet this week and will be rolled over. Approx. $13.6bn in Notes, Bonds, and TIPS (incl compensation) will roll off the 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
MCP Market Update: July 11th, 2022 – Overhead Resistance
MCP Market Update: July 5th, 2022 – Wedging?
The Macro Outlook for w/c 4 July 2022
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
