Key events for the week ahead – US ISM services PMI, RBA & BoC policy decisions, global services PMIs
Recap from last week
As broadly expected, Chair Powell signaled that “the time for moderating the pace of rate increases may come as soon as Dec.” The timing of that moderation was “far less significant” than questions over how far rates need to go to control inflation and the length of time to hold policy at restrictive. The policy message was ‘higher for longer’ amid a high degree of concern and uncertainty around the path of inflation. The Q&A with Chair Powell outlined the FOMC approach to managing the risk of inflation becoming entrenched (emphasis added);
Another is to hold on longer at a high level and not, you know, loosen policy too early. I don’t want to over-tighten certain we, my colleagues, and I do not want to over-tighten because, you know, we, I think that cutting rates is not something we want to do soon. (Brookings speech transcript; 45.54sec)
Chair Powell’s Brookings speech laid out how the FOMC views the conditions it needs to see to bring inflation back to 2%. To that end, several points this week may be concerning for the FOMC; the re-acceleration of average hourly earnings growth, continued falls in participation, and sticky PCE core-services ex-housing inflation.
There are signs of moderation in the US labour force momentum. The Fed’s Beige Book for Nov noted that ‘hiring and retention difficulties eased further, although labor markets were still described as tight’. Payrolls growth came in higher than expected but growth continues to moderate. The household survey showed a decline in the number of people employed. The fall in participation, albeit slight, offset the decline in employed persons, so the unemployment rate remained at a low 3.7%. JOLTS data from Oct reinforced that the labour market momentum is slowing, but not yet showing negative trends in broader layoffs and discharges. Initial claims remain low but there is an upward trend in continuing claims (SA) beginning to emerge.
The PCE ‘core services ex housing’ measure of inflation was a key focus in Chair Powell’s Brookings speech – outlining the link between current tightness in the labour market, wage growth, and trends in underlying inflation pressure (important). While headline US PCE inflation continued to moderate, the core services (ex-energy services) accelerated to +5.1% as housing and other services prices ex-housing continued to accelerate or remained elevated. The Oct data suggests little in the way of underlying inflation trends abating.
Outlook for the week ahead
We are now in the blackout period ahead of the FOMC meeting next week.
This week, the RBA and BoC will meet on policy. The RBA is expected to increase rates by a further 25bps to 3.10% (outside chance for +15bps?). Inflation remains high and the labour market remains tight in Australia. There is uncertainty over whether the BoC may step down to a smaller 25bps increase this month from 50bps.
The US ISM services PMI for Nov will be released and is expected to show moderation in services activity but remain in expansion. The global S&P services PMIs will be released this week also.
The ECB will meet next week. ECB President Lagarde will give speeches this week which may provide an opportunity to fine-tune/change any signaling for that meeting (currently expecting +50bps in rates).
This week, the US Treasury will auction and settle approx. $22bn in ST Bills with a net paydown of $54bn.
Approx $11.8bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $1bn in ST Bills will mature on the Fed balance sheet this week and will be redeemed.
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
