by Kim | Aug 29, 2022
Key events for the week ahead – US non-farm Payrolls, Fed speak, Euro area CPI for Aug, PMI’s
Recap from last week
The markets continue to digest the hawkish message from Jackson Hole – that central bankers (except the BoJ) are committed to addressing high inflation, with rates likely to remain higher for longer. This has been the key message from the US Fed over the last few weeks (via speeches and Minutes).
Fed Chair Powell set the tone and used his opening remarks at Jackson Hole to further distill the key messages of the last few weeks. The shorter message: as long as inflation stays high, rates will stay high. Emphasis was on the FOMC moving ‘purposefully’ to a sufficiently restrictive level to return inflation to 2% and taking ‘forceful and rapid steps’ to ensure inflation expectations remained anchored. It was noted that there will be some pain, and to expect softer growth and labour market conditions (so while inflation is still high, don’t expect rate cuts). The current long-run neutral rate is not the place to stop and claim a premature victory. Once at a sufficiently restrictive level, that policy stance will likely be maintained ‘for some time’, and until the Fed is ‘confident that the job is done’. Chair Powell referenced the median projection of the FFR of just below 4% in the SEP (as of June) – maybe as a guide for an appropriately restrictive level of the FFR.
Towards the end of the speech, Fed Chair Powell referenced the period of ‘high and volatile inflation’ of the 1970’s and 1980’s – noting that the FOMC deliberations build on the lessons of that period. The world is once again in a high and volatile inflation environment.
The flash PMI’s released last week for Aug were disappointing. Slower growth momentum was recorded across the G4 countries. Weaker orders are still a key theme. Manufacturing output contracted – most notably in the UK, but also in Germany and the Eurozone. Services momentum also slowed, but less so in the UK. The US Services sector continued to contract at a notable pace (from 47.3 in Jul to 44.1 in Aug).
US PCE inflation for Jul mirrored that of the CPI for Jul with a slight decline in the month and headline easing to +6.3% in Aug from +6.8% in Jul. Durable and non-durable goods prices declined in the month while services prices were little changed at +0.1%. Core PCE inflation slowed to +4.6% over the year in Aug.
Outlook for the week ahead
The main focus for the week will be US non-farm payrolls for Aug – the second last important data point before the next FOMC meeting. Nonfarm payrolls are expected to increase by +285k in Aug after a +528k increase in Jul. The unemployment rate is expected to remain at 3.5% and participation unchanged at 62.1%. The high frequency initial jobless claims data has been more positive in recent weeks with claims now under +250k.
US Fed speakers are scheduled throughout the week, including Vice Chair Brainard. Speeches are expected to build on the hawkish message.
The flash Aug CPI for the Eurozone will be released this week (including country-level data throughout the week). Inflation is expected to increase by +1.1% in the month (from +0.1% in Jul) and to increase to +9% over the year (from +8.9% in Jul).
The final global PMI’s for Aug will be released through the week starting with manufacturing. The official Chinese PMI’s will also be released and are expected to show slower growth momentum.
This week, the US Treasury will auction and settle approx. $380bn in ST Bills, Notes, Bonds, and TIPS, raising approx. $77bn in new money.
Approx. $37bn in ST Bills and Notes will mature on the Fed balance sheet this week and will be rolled over. Approx $10bn in Notes, Bonds, and Bills will roll-off the Fed balance sheet this week (QT).
Quantitative Tightening for September – The higher month cap of $60bn for Treasuries comes into effect in Sept, starting this week. Approx. $43.6bn in SOMA Coupons on the Fed balance sheet will mature in Sept (15 and 30 Sep). As this total is below the $60bn cap, all maturing Coupons will be redeemed this month. That means that maturing Bills on the balance sheet will make up the residual $16.3bn of the $60bn redemption cap and will also roll-off the balance sheet this month.
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 | Aug 29, 2022
Global Central Banks have been very clear - their primary focus is to reign in inflation by raising rates and signal future rate expectations. Powell has set the scene for restrictive monetary policy in a 180 degree turn from the last 20 years. Tightening financial conditions in a highly leveraged world are negative for risk […]
by Kim | Aug 22, 2022
Key events for the week ahead – Jackson Hole Economic Symposium
Recap from last week
The minutes of the Jul FOMC meeting quelled the idea of a dovish Fed pivot at this time. The minutes showed that moving to a “restrictive stance of policy was required” given the elevated level of inflation. The Fed is still concerned about the upside risks to inflation and of inflation expectations becoming unanchored. Even though the Jul CPI had moved lower, the FOMC noted that declines in the price of oil and other commodities “could not be relied on as providing a basis for sustained lower inflation”.
But as policy tightens further, the FOMC said that it would be appropriate to “slow the pace of increases” as it assesses the cumulative impact of hikes/tightening. Once policy was “sufficiently restrictive” it may also be appropriate to maintain that level to ensure inflation was firmly on a path back to 2%. In other words, rates may stay higher for longer, depending on the path of inflation and the economy. The unanswered question; what is the ‘appropriate’ level of restrictive policy rates?
Data out of the US was mixed last week. The recent negative trend in initial jobless claims has reversed somewhat. The weekly growth in initial claims remains around +250k. US headline retail sales growth for Jul was slightly lower than expected – led by declines in motor vehicles and gasoline, noting that gasoline prices declined by over 7% in the month. Ex autos and gasoline, retail sales increased by +0.7% in Jul (+0.7% in Jun). The regional manufacturing surveys for Aug continued to reflect weakness in new orders. But industrial output and, specifically, manufacturing output growth improved in Jul. Data on the US housing market continued to disappoint with conditions deteriorating further in Aug and existing home sales also falling notably in Jul.
Inflation outside of the US is still extremely elevated as energy prices in the UK and Europe continue to rise. UK CPI in Jul was +10.1% (expecting +9.8%). UK core CPI was also higher at +6.2% (expecting +5.9%). Eurozone CPI for Jul was confirmed at +8.9% and +0.8% in the month. Germany’s PPI for Jul surprised to the upside, increasing by 37.2% over the year (expecting +32.7%) and increasing by over 5% in the month. This was led by but was not limited to, further increases in electricity and natural gas prices. The headline CPI for Japan also increased more than expected in Jul by +2.6% (expecting +2.2%). This was led mostly by higher food prices, but also a smaller contribution from prices for electricity & gas charges, clothing, and communications.
The outlook for the week ahead
The annual Kansas City Fed Jackson Hole Symposium will be the main event this week – “Reassessing Constraints on the Economy and Policy”. US Fed Chair Powell will speak on Friday morning. We expect a continued hawkish tone. Chair Powell isn’t likely to provide any detail for the Sep FOMC meeting, given another CPI and payrolls report is due before then.
US PCE inflation for Jul will be released on Fri, along with the University of Michigan consumer sentiment reading for Aug.
The prelim S&P PMIs for Aug will be released this week and will provide a further guide on private sector momentum compared to Jul. Growth is expected to ease slightly, especially across Europe and the UK.
The Minutes of the last ECB meeting will also be released.
This week, the US Treasury will auction and settle approx. $313bn in ST Bills and 2yr FRN’s, raising approx. $102bn in new money. Treasury issuance will be supplemented with the addition of a 21-Day CMB ($60bn). The US Treasury will also auction approx. $126bn in 2yr, 5yr, and 7yr Notes – which will settle on 31 Aug.
Approx. $17bn 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 | Aug 22, 2022
Last week, the SPX / ES tagged our upside targets in the 200 day sma and 61.8% fib retracement area as per our last update. There are enough waves in place to complete (v) of an extended wave (c) from where bears need to make a stand. The SPX / ES tagged the 200 day […]
by Kim | Aug 15, 2022
Key events for the week ahead – FOMC Minutes, RBA Minutes, RBNZ monetary policy meeting, US retail sales, inflation; UK, Canada, & Japan
Recap from last week
US headline CPI decelerated slightly more than expected to +8.5% in Jul (expecting +8.7%) – from +9.1% in Jun. The monthly CPI declined slightly by -0.02% (expecting +0.2%). The main contributor to the slower inflation print was the fall in energy prices, especially gasoline prices. Core goods also contributed slightly to the headline deceleration as new and used car & truck price growth slowed (has been easing for six months). But food price growth continued to accelerate in the month and over the year while core services price growth remained at +5.5%.
Measures of median and trimmed mean CPI continued to accelerate in Jul, suggesting that underlying inflation pressures remained persistent. Inflation expectations from the University of Michigan survey show an easing in inflation expectations for the next year down to 5% (down from a peak of +5.4%), but expectations for inflation over the next five years were unchanged at 3% (equal to the recent peak).
The pace of wage growth is also an important barometer for the FOMC. The Atlanta Fed wage tracker showed wage growth continued to accelerate through Jul. While a welcome boost to real income, it suggests continued tightness in the labour market. The NY Fed Global Supply Chain Pressure Index suggests that the supply chain shock (which accounted for some of the inflation pressure) continues to ease, but that supply chain pressures still are historically elevated.
Fed signaling was consistent; ‘not near done yet’ as inflation is still well above the 2% target, but a step in the right direction. Over the last two weeks, the Fed has repeatedly attempted to quash the idea of a Fed pivot, or that rates might be cut in 2023 while inflation remains so far above the target. Kashkari, Daly (more of a dove), and Barkin speeches supported a further outsized hike for Sep (none are voting members in 2022). Daly was less hawkish but noted she was “looking for the data in the aggregate to affirm the Fed is on a path to bring inflation down substantially and achieve the price stability target”. Kashkari went as far as saying that Fed credibility was on the line as it works to bring inflation back to its mandated 2% target.
Outlook for the week ahead
The US FOMC will release the minutes of its last meeting. After that meeting, the decision was interpreted as a ‘pivot’ and the minutes may provide further insight into that and the outlook for Sep. US retail sales growth is expected to slow to +0.1% in Jul (from +1% in Jun). US housing data is expected to show further slowing of existing home sales to 4.88m (SAAR) and housing permits and starts in Jul. The high-frequency initial jobless claims data will continue to be monitored as it edges up over +260k.
The RBA will release the minutes of the Aug meeting. The Board increased the cash rate target by 50bps, expected further hikes were necessary to bring down inflation but signaled its intent to keep the economy ‘on an even keel’. The important wage price index for Q2 is expected to show further acceleration in wages of +0.8% over Q2 and +2.7% over the year (from +2.4% in Q1). The labour market in Jul is expected to remain strong with +25k growth in employment, participation unchanged at a high of 66.8%, and the unemployment rate remaining at a low 3.5%.
The RBNZ is expected to increase rates by 50bps to 3%.
Inflation readings for Jul: Japan; headline CPI is expected to slow to +2.2% (from 2.4% in Jun), UK CPI is expected to accelerate to +9.8% in Jul (from +9.4% in Jun), and Canadian CPI is expected to slow to +7.6% in Jul (from 8.1% in Jun).
This week, the US Treasury will auction and settle approx. $329bn in ST Bills, Notes, and Bonds, raising approx. $74bn in new money. The US Treasury will also auction approx. $23bn in 30yr TIPS and 20yr Bonds – which will settle on 31 Aug.
Approx. $81bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be rolled over. Approx $23bn in Notes & Bonds will mature and be redeemed as a part of the QT balance sheet roll-off.
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
