The Macro Outlook for w/c 10 October 2022
Key events for the week ahead – US CPI, FOMC minutes, and US retail sales
Recap from last week
US labour market data for Sept was mostly in line with expectations. Payroll growth is slowing, but still high enough to indicate tight labour market conditions. The notable fall in the unemployment rate was however due to a fall in participation as employment growth moderated. The labour data last week is not expected to cause the Fed to rethink the pace of rate hikes, but some data may begin to catch their attention. First is the notable fall in job openings in Aug. Engineering a fall in openings has been a pillar of the Fed’s ‘soft landing’ thesis – to reduce demand for new jobs rather than existing employment. Openings are historically elevated, and there is still a long way before this series ‘normalizes’. Second, while the bigger gains in hourly earnings were in services, some key ‘reopening’ industries also reported the smallest gains in earnings in the month – retail trade, education & health, and leisure & hospitality. Finally, initial claims jumped back above +200k and are expected to increase again this week (+225k). The trajectory of these indicators is important for the moment.
Fed speeches last week remained hawkish. Governor Waller said that the inflation outcomes in the Aug report were “not the inflation outcome” that would support a slower pace of hikes. Waller notes the latest SEP has between 100 and 125bps of hikes over the next two meetings and data is still supportive of another 75bps in Nov – but that depends now on inflation leading up to Nov. The target rate probability has shifted back to a +75bps increase in Nov.
The global manufacturing PMI shifted into contraction in Sep. The G7 countries slowed again and most stayed in contraction except the US & Japan (only a modest expansion). The US was the only G7 country where the manufacturing PMI expanded, albeit slightly. There was a notable contraction in parts of Asia (Taiwan, Sth Korea, and China) and Europe esp. Germany and France. Manufacturing among the ASEAN group accelerated. The global services output shifted from contraction to neutral (this excludes the China result which recorded a large slowdown from 55 in Aug to 49.3 in Sep). The G7 was mixed. Japan’s services activity accelerated into moderate expansion. US services improved from a low level but remained in contraction. Eurozone services contracted at a faster pace – led by a further deceleration in Germany and Italy.
The RBA surprised with a lower hike of 25bps (expecting +50bps) to “assess the outlook for inflation and economic growth in Australia”. The RBA is concerned about the impact of rapidly rising rates on households as variable rate mortgages account for approx. 65% of outstanding mortgages in Aus (source; RBA). Rate increases are expected to be passed through over the next few months. The RBA released the financial stability review for Q3 which includes details of the impact of rising rates and inflation on households in Australia.
Outlook for the week ahead
US CPI will be the main focus. Headline CPI for Sept is expected to ease to +8.1% (from +8.3% in Aug) as monthly inflation is expected to increase by +0.2% (from +0.1% Aug). Core CPI is expected to increase by +6.5%, up from +6.3% in Aug. The OPEC decision last week (and the oil price reaction) raises the spectre of volatile CPI readings in the months ahead which will concern policymakers.
US retail sales are expected to increase by +0.3% in Sept from +0.2%.
The FOMC minutes will be released this week. Fed speeches during the week include Vice Chair Brainard on Monday.
The BoE temporary Gilt purchase program is due to end on 14 Oct. The BoE has announced additional measures to ensure an orderly exit from the intervention.
This week, the US Treasury will auction and settle approx. $227bn in ST Bills with another net paydown of -$2bn.
The US Treasury will also auction the 3yr and 10yr Notes and the 30year Bond – all will settle next week.
QT; approx. $17.7bn of ST Bills will mature on the Fed balance sheet this week. Of this total, approx. $3.5bn in ST Bills will be redeemed/roll-off the balance sheet and approx. $14.2bn in ST 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
MCP Market Update: October 10th, 2022 – Testing Support (again)
The Macro Outlook for w/c 3 October 2022
Key events for the week ahead – US non-farm payrolls, RBA & RBNZ policy decisions, US Fed speeches
Recap from last week
The BoE intervened with an emergency program to buy long-dated UK government bonds to “restore orderly market conditions”. The intervention was to be “strictly time-limited”, ending on 14 Oct. The commencement of the outright sale of Gilts from the BoE balance sheet was postponed until 31 Oct. At the time of writing, the UK government has announced that it will drop a part of its spending plan given the adverse market response.
Amid the hawkish messaging, some US Fed speeches noted a ‘two-sided risk’ of rapidly rising rates. In a speech late last week, US Fed Vice Chair Brainard said that the “global environment of high inflation and rising interest rates highlights the importance of paying attention to financial stability considerations for monetary policy”. Global policy tightening has been rapid “by historical standards” and it will “take time” for tightening to work through sectors. Monetary policy will still need to be “restrictive for some time” but also recognize “that risks may become more two-sided at some point”. (Speech; Global Financial Stability Considerations for Monetary Policy in a High-Inflation Environment). By the end of last week, probabilities for the next US rate hike had become more evenly split between a 50 and 75bps increase. In the prior week, the probability had been firmly in favour of a 75bps increase.
US headline PCE inflation slowed to +6.2% in Aug as gasoline prices eased. But core PCE inflation accelerated from +4.7% in Jul to +4.9% in Aug. The Dallas Fed 12-mth trimmed mean (core inflation) rate accelerated to a cycle high of +4.7% in Aug, up from +4.5%. The US initial jobless claims (SA) also continued to slow and new claims fell to +193k last week. This is a useful high-frequency indicator of current labour market strength.
Inflation in the Euro area accelerated notably in the prelim Sep release increasing to +10% in Sep from +9.1% in Aug. While the headline is higher due to rising energy prices (+3% just in the month), price growth accelerated across all major expenditure categories.
The first monthly Aussie inflation release showed a slight easing in the inflation rate from +7% in Jul to +6.8% in Aug. The easing in the rate of inflation was due to the fall in auto fuel prices as the fuel excise tax was reduced (this measure expired on 28 Sep).
Outlook for the week ahead
US non-farm payrolls for Sep are expected to remain strong increasing by +250k (Aug +315k). The participation rate is expected to fall slightly to 62.2% while the unemployment rate is expected to be unchanged at 3.7%. The US ISM manufacturing and services PMIs will be released – growth momentum is expected to ease slightly.
There will be a large number of Fed speeches this week including FOMC members Waller, Jefferson, Williams, Cook, George, and Mester.
The remainder of the global PMIs for Sep will be released this week.
The RBA and RBNZ will meet this week and both central banks are expected to increase their policy rates by 50bps. The RBA has previously noted that it expects to slow the pace of hikes to keep the economy on an even keel. The previous minutes showed that the Board was already considering a 25 or 50bps increase last month. Aus labour market conditions remain strong, while housing continues to ease.
The next OPEC meeting is scheduled for 5 Oct 2022.
This week, the US Treasury will auction and settle approx. $255bn in ST Bills with a net paydown of -$2bn.
QT; approx. $25.5bn of ST Bills will mature on the Fed balance sheet this week. Of this total, approx. $5.1bn in ST Bills will be redeemed/roll-off the balance sheet and approx. $20.4bn in ST 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
MCP Market Update: October 3rd, 2022 – Bear market decline
