The Macro Outlook for w/c 8 August 2022
Key events for the week ahead – US CPI
Recap from last week
US Fed speeches walked back market interpretations of a Fed ‘pivot’ from the last FOMC meeting. Speakers remained hawkish, signaling their commitment to bring down inflation, that there was ‘still a long way to go to reach the price stability target of 2%’, and that the Fed was looking for “compelling evidence” of inflation slowing.
Stronger US data helped to offset the emerging recession narrative. This was led by higher-than-expected growth in non-farm payrolls for Jul of +528k (versus +250k expected). Average hourly earnings also increased by more than expected. The household employment survey was mixed; employment growth was positive, but low for the month. The unemployment rate still declined to 3.5% because more people left the labour market. Initial claims continued to edge slightly higher.
The Jul US ISM PMI surveys diverged. The manufacturing PMI recorded a further, albeit slight slowdown in momentum (similar to the S&P PMI). Manufacturing demand contracted led by domestic orders while new export orders rebounded. The ISM Services PMI recorded improved momentum as growth in orders and output were more widespread in Jul. This is in stark contrast to the S&P services PMI which recorded a sharp contraction in the US services sector in Jul.
The BoE surprised markets by increasing the bank rate by a further 50bps. It was also a notable meeting in that the inflation forecast was upgraded to peak around +13% in Q4 2022 and the BoE announced that it expects the UK to enter a recession from Q4 2022. The BoE staff presented a strategy for the outright sale of UK Gilts held on the BoE balance sheet. This program will be voted on at the Sep meeting and is likely to begin shortly thereafter. This week, UK Q2 GDP will be released, and the economy is expected to contract by -0.2% in Q2.
The RBA increased the cash rate target by a further 50bps last week. There was little in the way of guidance other than further normalization is to be expected in the coming months due to high inflation. The Board needs to see elevated inflation come down (forecast to take about 2 years to get back to the 2-3% range) to the target but is intent on keeping the economy ‘on an even keel’.
The Jul S&P PMIs reflected slower growth momentum in manufacturing and services activity in many developed markets. There were notable falls in headline PMIs in US services (-5.4pts), Mexico manufacturing (-3.7pts), Taiwan manufacturing (-5.2pts), and Japan services (-3.7pts).
The week ahead
Inflation will be the key theme this week. The US Jul CPI report will be one of two CPI reports before the next FOMC meeting in Sep. Inflation data generally, will be important in the context of the next steps for the path of rates in the US and will be closely monitored over the next six weeks. The expectation is for Jul CPI to have slowed to +8.7% (from +9.1% in Jun). The monthly growth will be closely watched with CPI expected to increase by just +0.2% in Jul after increasing by +1.3% in Jun. Core measures of CPI are expected to stay elevated at +6.1% over the year and +0.5% for the month. Fed speeches after the CPI release are expected. The prelim Aug University of Michigan consumer sentiment, including inflation expectations, and Q2 unit labour costs will also be released this week.
There will be other measures of inflation reported this week with four European final CPI reports for Jul (Germany, France, Italy, and Spain), China CPI for Jul, and Aus consumer inflation expectations for Aug.
This week, the US Treasury will auction and settle approx. $265bn in ST Bills, raising approx. $40bn in new money.
The US Treasury will also auction approx. $98bn in 3yr and 10yr Notes and 30yr Bonds – which will settle next week.
Approx. $22bn 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
