by Kim | Nov 28, 2022
Key events for the week ahead – US Non-farm payrolls, US Fed Chair Powell, Euro Area flash CPI Nov, Central bank speeches
Recap from last week
The FOMC minutes reflected growing support for slowing the pace of rate hikes, with a ‘substantial majority of participants’ judging that it ‘would likely soon’ be appropriate to do so. But ‘a few other’ participants see merit in moving the policy rate into ‘clearly restrictive territory’ before slowing the pace of hikes – to ensure there were more concrete signs inflation pressures were receding ‘significantly’. The minutes noted that the ultimate level of the FFR was more important at this stage than the pace of further increases. The ultimate level of the FFR in this cycle is still highly uncertain. Ongoing increases are still expected and ‘various participants’ noted that the ultimate level of FFR might be higher than previously thought.
By the end of last week, the US 2-10yr spread reached another YTD low of -0.75bps, amid further expectations for slowing growth. Markets are still pricing the likelihood of a smaller +50bps hike in Dec. Signalling will be important this week with Fed Chair Powell talking at the Brookings Institute on Wed 30 Nov. If changes are likely to the pace of hikes in Dec, then Chair Powell will possibly signal that ahead of the blackout period before the FOMC meeting on 13-14 Dec.
Flash PMIs for Nov were disappointing. US manufacturing shifted into mild contraction while the contraction in services accelerated. The Eurozone recorded a slightly slower contraction in manufacturing while the contraction in services continued. Japan recorded a notable slowdown in services momentum and manufacturing momentum shifted into a slight contraction. Finally, manufacturing momentum in Aus slowed further while services activity continued to contract.
The RBNZ increased its OCR by +75bps to +4.25% citing high inflation, strong demand (including a faster recovery in international visitors), low unemployment, and ‘worker shortages holding back output across many industries and regions’.
Outlook for the week ahead
US labour market data will be in focus this week and an important input for the FOMC in Dec. Non-farm payrolls are expected to increase by a further +200k jobs. The unemployment rate is expected to remain at a low of 3.7%. There will be several other US labour market indicators; JOLTS for Oct (expecting +10.3m), anecdotal job cut/hire announcements, and the high-frequency initial claims (expecting +235k). Despite remaining low, initial claims increased last week to +240k (from +220k).
US PCE inflation for Oct will be released. This is the FOMC preferred measure of inflation. Headline PCE inflation is expected to remain at +6.2% with the monthly pace increasing to +0.5% (up from +0.3% in Sep). Core PCE inflation is expected to slow slightly to +5% (from +5.1% in Sep).
The US ISM manufacturing PMI will be released this week – and is expected to show a mild contraction in activity. The S&P PMI’s (global) for Nov will start to be released this week providing some insight into global growth momentum.
The Euro area (and individual country-level) flash CPI for Nov will be released. The annual pace is expected to ease slightly to +10.4% (from +10.6% in Oct). Falls in producer energy distribution prices have started to show up, for example in the notable monthly decline in the Germany PPI last week of -4.2% in Oct.
There will be several central bank speeches this week – including BoJ Governor Kuroda and RBA Governor Lowe. Many will also take part in the Bank of Thailand/BIS conference “Central Banking Amidst Shifting Ground” (Fri 2 Dec).
This week, the US Treasury will auction and settle approx. $421bn in ST Bills, TIPS, Notes, and Bonds, raising approx. $58bn in new money.
Approx $38bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested.
Approx $21bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be redeemed.
The QT summary for Dec; In December, the face value of Coupons maturing on the Fed balance sheet is approx. $53.5bn. As this is below the $60bn cap for balance sheet roll-off, all maturing Coupons will be redeemed this month. That means that maturing Bills on the balance sheet will make up the residual $6.5bn up to the $60bn redemption cap 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 | Nov 28, 2022
Did we get our Thanksgiving Top or is there one more marginal push higher? Equities edged higher as expected but are now approaching critical resistance for the bear case. Bears need to make a stand in this sell zone or risk getting run over. Markets are still expecting a slowdown in economic growth as evidenced […]
by Kim | Nov 21, 2022
Key events for the week ahead – FOMC & ECB Minutes, Flash PMIs Nov, RBNZ policy decision, US Thanksgiving Holiday
Recap from last week
US Fed speeches hinted at the possibility to slow the pace of policy tightening from the Dec meeting. Markets are pricing a step down to +50bps. But as noted at the last FOMC meeting, it is the level of rates that is important now. Bullard sees the FFR higher, 5-5.25% at a minimum to get into the restrictive zone. Market probabilities are currently pricing up to that level and peaking in mid-2023. The US 2-10yr spread reached a YTD low of -0.69, as the resulting growth expectations fell.
So far, US consumer spending remains robust. Retail sales growth was higher than expected in Oct and spending was stronger across most categories. High-frequency initial claims also remain low. But there was further weakness in regional manufacturing surveys. Weaker/declining new orders became more widespread in Nov. Output growth stayed positive as firms worked through backlogs and supply chains adjusted. US housing market conditions and sales deteriorated further as credit tightens and mortgage rates stay elevated.
Inflation outside of the US showed little sign of easing in Oct. Euro area inflation was confirmed at +10.6% with price growth accelerating across most categories. Inflation in the UK came in higher than expected at +11.1% and core was also up to +6.5%. Inflation in Canada stalled with the headline rate remaining at +6.9%. Japanese inflation came in higher than expected and core ex-fresh food accelerated to +3.6% (from +3% in Sep). The BoJ has previously noted that the weakening Yen has been a driver of higher import costs for commodities, thereby driving up consumer inflation. This is not the kind of inflation the BoJ is looking for. Japanese GDP unexpectedly contracted in Q3 as personal consumption growth slowed and net exports declined.
The RBA minutes covered the policy debate and included details of the review of forward guidance. The 25bps increase was favoured given how fast the RBA had already hiked and the uncertainty over how household spending would react to the rapid tightening of conditions. Wage growth came in higher than expected in Q3 at +3.1% over the year with a notable acceleration in private sector wages to +3.4% (also linked to annual wage reviews). The labour market tightened further in Oct as employment increased by more than expected and the unemployment rate fell back to 3.4%. With inflation remaining high, this is likely supportive of further tightening.
Outlook for the week ahead
It’s a short week for the US Thanksgiving Day Holiday.
FOMC minutes will be released. This will likely include the debate for taking into account the ‘cumulative tightening of monetary policy’ (slowing the pace) amid significant uncertainty around the level of interest rates required for what might be deemed as ‘sufficiently restrictive’. Expecting the minutes to reinforce that there is “still some ways to go” on rates.
The lead-up to the next FOMC meeting could be interesting as markets digest Fed signaling and important data for rates just prior to the next FOMC meeting. Chair Powell is scheduled to speak at a Brookings event on Wed 30 Nov – the week before the blackout week for the 13-14 Dec FOMC meeting. Signaling from Chair Powell on the pace of hikes is likely at this event. The Brookings speech will be two days before the Nov non-farm payrolls (the last day before the blackout period), while the important Nov CPI will be released on 13 Dec, the day before the Dec FOMC announcement.
The flash PMIs will be released this week for Nov. Expectations are for continued moderate contraction in the Eurozone, UK, and US (services). Momentum is expected to slow in Aus and be little changed in Japan.
The RBNZ will meet this week on policy. The RBNZ stepped up the pace of hikes to 50bps back in Apr 2022 and there is an expectation that it may step up the pace to a +75bps increase this week.
This week, the US Treasury will auction and settle approx. $314bn in ST Bills, Cash Management Bills, and FRNs raising approx. $78bn in new money.
The US Treasury will also auction the 2yr, 5yr, and 7yr Notes this week. These will settle on 30 Nov.
Approx $16bn in ST Bills will mature on the Fed balance sheet this week and 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
by Mars Capital Partners | Nov 20, 2022
Equity markets stalled below initial resistance last week as they digested the post-CPI rally. We do not have confirmation of a near term top as the potential remains for a final push higher in wave v of (c) towards secondary targets. We continue to count this rally as a correction within a bigger picture bear […]
by Kim | Nov 14, 2022
Key events for the week ahead – US retail sales, US Fed speeches, CPI for Oct; Japan, UK, Canada, and the Euro area, China data, G20
Recap from last week
US CPI growth slowed more than expected in Oct increasing expectations that the FOMC will slow the pace of hikes and pause tightening earlier. Fed speeches supported a likely shift to a slower pace of hikes, but emphasized that “a slower pace should not be taken to represent easier policy” (Lorie Logan – Dallas Fed President). By the end of the week, the target rate probability for the Dec Fed meeting was pricing a +50bps increase, from an even split between 50 and 75bps increase. On Sunday, Governor Waller said that “It’s really not so much about the pace anymore, it’s where we’re going (to) end up. And where we end is going to be driven solely by what happens with inflation.” (Source: Bloomberg).
Headline US CPI slowed from +8.2% in Sep to +7.7% in Oct. The areas of disinflation suggest that the commodity price and demand shocks from the pandemic and the Ukraine invasion appear to be easing. Monthly food price growth has slowed further, but this is not yet visible in the annual change. Energy price growth has eased but remains volatile.
Core CPI slowed from +6.6% in Sep to +6.3% in Oct. Slower core CPI was mostly the result of a further fall in used car prices (falling for the fourth month and up only +2% on a year ago) – with demand across autos (and durables) likely impacted by higher rates and some tightening of lending standards. This was partly offset by faster growth in core services led by shelter price growth (no sign of rolling over yet). Other measures of underlying CPI remained elevated while the monthly trend may be rolling over. Sticky prices stalled at the current peak of +6.5%.
The bigger picture is that slowing CPI is yet to coincide with a weaker labour market or slower wage growth. So while the impact of price and demand shocks might be starting to fade, the inflation story may not be over. The Atlanta Fed wage growth tracker for Oct recorded a further acceleration in wages (overall measures) from +6.3% in Sep to +6.5% in Oct, and wage growth acceleration was recorded across most indicators. US consumer sentiment indicators weakened at the start of Nov as consumer inflation expectations edged higher again. This likely means the Fed stays the course on tightening for now. Early this week, Fed Governor Waller noted that “So it’s good, finally, that we saw some evidence of inflation starting to come down, but I just cannot stress [enough] this is one data point. We’re going to need to see a continued run of this kind of behaviour and inflation slowly starting to come down, before we really start thinking about taking our foot off the brakes here.”
Outlook for the week ahead
US data and Fed speeches will be prominent. US retail sales for Oct are expected to increase by +0.9%. Housing data is expected to remain weak with existing home sales expected to slow to 4.4m (SAAR basis). A substantial number of FOMC members will speak this week, including Vice Chair Brainard.
More inflation data is due this week. The UK CPI for Oct is expected to accelerate to +10.6% (also UK labour market data and the budget release on 17 Nov). Canada CPI is expected to increase to +7% in Oct. Japanese CPI is expected to slow to +2.7%, but ex-fresh food to increase to +3%. Euro area final CPI for Oct is expected to be +10.7%.
The RBA minutes will be released. Aus data is expected to show that the labour market remains robust amid policy tightening. The Aus Q3 wage price index is expected to increase by +3% year on year, up from +2.6%. Aus employment is expected to increase by +15k, the participation rate to remain at 66.6%, and the unemployment rate to remain at a low 3.5%.
This week, the US Treasury will auction and settle approx. $351bn in ST Bills, Notes, and Bonds raising approx. $65bn in new money.
The US Treasury will also auction the 20-year Bond and 10-year TIPS this week. These will settle on 30 Nov.
Approx $93bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week. Of this, approx. $40.4bn in Notes and Bonds will mature and roll-off the Fed balance sheet (as a part of the $60bn cap). The remaining $52.7bn of ST Bills, Notes, and Bonds that will mature this week 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
