Key events for the week ahead – Central bank speeches including Fed Chair Powell, Eurozone CPI, and US PCE inflation
Recap from last week
Markets are continuing to digest the details of last week’s monetary policy decisions.
High, and seemingly persistent, inflation is keeping the FOMC on its unwavering hawkish path. The FOMC increased rates by +75bps as expected. The SEP shows rates higher for longer, with no cuts projected until 2024. The FOMC view of restrictive policy is where real yields are positive across the yield curve (using core PCE measures). The market reaction so far has been a shift up in the yield curve, further inversion, and pricing another 75bp hike for Nov.
The BoE raised by 50bps as expected with the decision to sell bonds from its Asset Purchase Facility. The rate hike decision was not unanimous. Three members voted for a 75bps increase citing that the energy price guarantee and fiscal support would add to demand pressure. This was a prescient outlook in light of the budget released at the end of the week. The proposed spending amid high inflation and monetary tightening has added greater pressure to rates and markets are currently pricing additional hikes before the next meeting (Source: Bloomberg). Eyes on the BoE this week.
Despite rising inflation, the BoJ kept policy settings unchanged, and markets are questioning how long the BoJ can remain an outlier. After weeks of currency weakening, and signaling an intervention, the government intervened to strengthen the Yen after the BoJ kept policy unchanged. The rates differential is still a fundamental issue that is reflected in currency weakness.
The RBA minutes for Sep highlighted that the Board was already starting to consider slowing the pace of hikes. When this was detailed several days after the Sep Board meeting, the implied cash rate futures terminal rate fell to 3.55% (Jul 2023) from 3.76%. But as of 26 Sep, the cash rate futures are now pricing a peak of 4.325% (source: ASX). The RBA meets next week, and it will be important how it responds to market expectations of higher rates (even another 100bps priced by year-end) and how this aligns with slowing the pace of hikes to keep an even keel.
Global prelim PMIS for Sep were mixed. Manufacturing output contracted except in Aus while services activity weakened except in Japan. Input cost increases were more widespread in Europe, especially in Germany.
Outlook for the week ahead
There will be a notable number of central bank speeches this week, including US Fed Chair Powell and ECB President Lagarde.
Inflation data will be in focus, especially in Europe. The Eurozone headline CPI is expected to increase to +9.6% in Sep (from +9.1% in Aug). Country-level CPIs will also be released.
US PCE inflation for Aug is expected to increase to +6.6% from +6.3% in Jul. The monthly pace is expected to increase to +0.3% from -0.1% in Jul. The University of Michigan consumer sentiment for Sep is expected to be unchanged. Durable goods orders for Aug are expected to decline by -0.5% (versus Jul -0.1%).
This week, the US Treasury will auction and settle approx. $393bn in ST Bills, Notes, Bonds, TIPS, and FRN’s, raising approx. $73bn in new money.
This week also marks the first large redemption as a part of this QT program. In total, approx. $55.6bn of ST bills, Notes and Bonds will mature on the Fed balance sheet this week. Of this total;
- Approx. $33.9bn in Notes & Bonds maturing will be redeemed/roll-off the balance sheet on 30 Sep.
- Approx. $21.7bn in ST Bills will mature on the Fed balance sheet this week. Of this, approx. $4.3bn of maturing Bills will be redeemed and the remaining $17.4bn of maturing Bills will be reinvested.
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
