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
