by Kim | Jan 30, 2023
Key events this week – Central bank policy decisions; FOMC, BoE, and ECB, US non-farm payrolls
Recap from last week
US inflation moderated in line with expectations. Headline US PCE inflation came in at +5% for Dec, slowing from +5.5% in Nov, led by falling energy prices. Core PCE eased as expected to +4.4%. The ‘super core’ measure emphasized by Fed Chair Powell remained little changed at just above +4% – highlighting the stickier nature of underlying inflation.
US growth was more robust than expected in Q4, increasing at an annualized pace of +2.9%. Growth is slowing, but not as much as expected. The data late in Q4 suggested some softening of US activity, as shown by falling retail sales and industrial production. But more recent growth in personal income, adjusted for inflation, has continued to accelerate. The 6mth SAAR of personal income (ex-transfer payments) adjusted for inflation reached +2.9% in Dec. The 10-year pre-pandemic avg is +3.1%. While spending growth has eased, the saving/surplus between income and spending, has instead started to increase again but remains well below the pre-pandemic level.
Continued strength in the US labor market will be important to help support income growth while the balance between consumption and saving adjusts. Initial claims continued to move lower last week to +186k despite further anecdotes of planned job cuts. The Jan non-farm payrolls growth this week is still expected slow, but remain robust at +175k jobs added.
The BoC has now signaled a likely pause in its hiking cycle to assess the impact of rate increases.
Aus CPI came in higher than expected at +7.8% (the RBA had previously noted a higher Q4 CPI print was expected). Aus PMIs and business surveys suggested some stalling in activity.
The G7 prelim PMIs for Jan showed services output improved (less negative in most cases) while manufacturing activity remained at a stalled pace.
Outlook for the week ahead
This week the FOMC is expected to step down to a pace of a 25bps rate hike. As growth and the labor market continue to hold up, the focus will be on remaining at a sufficiently restrictive level to help bring down inflation. Not likely to see a dovish shift as the job on inflation is not yet done. The tone is not likely to be overly hawkish though given some emerging weakness in economic activity. There may be greater emphasis on the optionality of “data dependence”.
The ECB is expected to increase rates by 50bps this week to 2.5%. Inflation is still elevated. The latest CPI for the Euro Area will be released before the ECB announcement. The prelim Jan CPI is expected to fall in the month, but remain elevated over the year at +9.1%. The prelim Eurozone GDP for Q4 is expected to contract slightly by -0.1%.
Similarly, the BoE is expected to increase rates by a further 50bps to 4%. Inflation is still elevated at +10.5%.
US labor market data will be in focus; non-farm payrolls are expected to increase by +175k in Jan. The Employment Cost Index (ECI) will also be released this week and will be an important marker for the pace of wage growth – expecting +1.2% for Q4. The Dec JOLTS report is expected to show a further slowdown in job openings to 10.2m. The Jan US ISM PMIs will also be released.
The S&P PMIs for Jan will provide a reading on the broader global growth momentum in Jan.
The US Treasury will auction and settle approx. $452bn in ST Bills, Notes, Bonds, TIPS, and FRN’s raising approx. $49bn in new money.
Approx $17.4bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $37bn in ST Bills, Notes, Bonds, and FRN’s will mature on the Fed balance sheet this week and will be redeemed/roll-off the Fed balance sheet.
The latest US Treasury borrowing requirements and Q1 refunding will be released this week.
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 | Jan 30, 2023
Last week, equities extended their recent rallies and broke out from bearish trend channels and triangles (forewarned is forearmed). Bears are on the defensive as markets look to squeeze higher this week in front of key rate meetings by the FOMC, ECB and BOE. Bulls are leading the narrative with the idea of a goldilocks […]
by Kim | Jan 23, 2023
Key events this week – US PCE Price Index, US GDP Q4, Aus & NZ CPI Q4, BoC policy meeting
Recap from last week
US data was mixed last week. Consumer spending and industrial output fell in Dec, while initial jobless claims remained low. Housing data was weak, but there was some sign of stabilizing. The FOMC is likely to step down to 25bps next week.
US retail sales fell more than expected in Dec and the decline was broad-based. The decline in the 6mth annualized change of real retail sales (now -3.8%) shows the slowdown in consumer spending gathered pace in Dec.
US Industrial production data confirmed recent survey weakness. Manufacturing output declined again and has now fallen behind a year ago (-0.5% below Dec 2021 versus up by +3.8% just back in Sep). Output growth has slowed notably over each of the last three months across both durable & non-durable goods industries.
Housing data showed some stabilization in home builder sentiment, while existing home sales continued to fall, albeit at a slower pace. Existing home sales have fallen to be only +0.2% ahead of the 2020 pandemic low. Mortgage purchase applications were stronger in the latest week aided partly by slightly lower mortgage rates.
Despite the weakening Dec data, US initial jobless claims (SA) fell below the 200k/week level to +197k for the week ending 14 Jan. Continuing claims were little changed.
US Fed speeches suggested that a further slowing in the pace of hikes could be expected next week. Vice Chair Brainard noted that the recent ‘downshift’ enables the FOMC to assess more data, while also reiterating that the policy rate will need to be sufficiently restrictive for some time given high inflation. The shift to a 25bps hike was all but confirmed with a WSJ article on 22 Jan – “Federal Reserve officials are preparing to slow interest-rate increases for the second straight meeting”.
The BoJ left policy unchanged last week. Guidance remained that the BoJ “will not hesitate to take additional easing measures if necessary; it also expects short- and long-term policy interest rates to remain at their present or lower levels”. Inflation is expected to decelerate toward the middle of the year while the median forecast for core inflation over 2023 was revised slightly higher to +1.8%. Actual core inflation (ex-fresh food & energy) increased to +3% in Dec (from +2.8% in Nov). Monthly core inflation slowed to +0.1% in Dec.
Outlook for the week ahead
US headline PCE price inflation for Dec is expected to ease from +5.5% in Nov. Core PCE is expected to ease to +4.4% in Dec from +4.7% in Nov. The advance estimate for US GDP growth in Q4 is expected to slow to an annualized pace of +2.6% (from +3.2% in Q3). Moderating inflation and growth will be important inputs for the FOMC meeting next week on 1 Feb.
Aus and NZ Q4 CPI will be released this week. Aus CPI is expected to moderate to +1.6% in Q4 but accelerate over the year to +7.5%. The next RBA meeting is on 7 Feb. NZ CPI is expected to ease slightly over the year to +7.1%. The next meeting of the RBNZ is on 22 Feb.
The BoC is expected to increase rates by a further 25bps and may then signal a pause in the hiking cycle. Inflation eased to +6.3% in Dec mainly due to lower energy prices. Core median inflation was little changed at 5% in Dec. Retail sales declined in Nov, with core retail falling the most in eleven months.
The prelim S&P PMIs for Jan 2023 will be released this week providing a gauge of global growth momentum going into the new year.
It will be another big week of US Treasury issuance. The US Treasury will auction and settle approx. $368bn in ST Bills (including another CMB) raising approx. $110bn in new money.
The US Treasury will also auction the 2, 5, and 7-year Notes and the 2yr FRN this week – to settle on 31 Jan.
Approx $18bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $1.3bn in ST Bills will mature on the Fed balance sheet this week and will be redeemed/roll-off the Fed balance sheet.
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 | Jan 23, 2023
Last week, equities turned sharply lower from resistance but were unable to sustain any break of near term support. The October lows remain intact. Friday's strong opex rally has called into question the bear case. The structure of equity indices, especially the Nasdaq and SPX, are starting to resemble a triangle compression, increasing the risk […]
by Kim | Jan 16, 2023
Key events for the week ahead – US retail sales, Fed speak, BoJ policy decision, CPI reports; Japan, Canada, UK, and the Eurozone, China GDP, Davos
Recap from last week
US CPI slowed again in Dec to +6.4% (from +7.1% in Nov). The monthly pace declined slightly. Food, core goods, and (mainly) energy prices contributed to the deceleration between Nov and Dec. The more nuanced view of CPI now taken by the FOMC is to look at underlying inflation via core services ex shelter. The closest metric, services excluding rent of shelter, accelerated from +7.3% in Nov to +7.4% in Dec but is down from the high of +8.2% in Sep.
Despite the peak in headline CPI, the Cleveland Fed core measures of median and trimmed-mean CPI are only easing slowly and remain elevated. The median CPI for Dec slowed to +6.92% from +6.98% in Nov (the peak was +7% in Oct) – and is still showing a broad persistence of inflation. Even the month change remained high BUT is on a slowing trend. The trimmed mean CPI slowed to +6.5% in Dec from +6.6% in Nov (peaked at +7.3% in Sep).
Despite persistent underlying inflation, the soft-landing narrative has quickly gained favor as headline inflation has eased amid robust labor market conditions. Fed speeches last week supported slowing the pace of hikes to 25bps in Feb but reiterated the expectation of a higher for longer policy rate setting.
Aus CPI growth was higher than expected, accelerating to +7.4% in Nov. Inflation likely remains uncomfortably high for the RBA – keeping alive further rate hike expectations. The re-set of higher mortgage rates is a concern for the RBA trying to keep the economy on “an even keel”. The Aus labor market survey for Dec is out this week – and labor market conditions are expected to remain tight. The next RBA meeting is on 6 Feb.
Outlook for the week ahead
US retail sales for Dec will gauge how consumption has been affected during this tightening cycle. US retail sales are expected to fall -0.8% in Dec. US industrial production (including manufacturing) for Dec will be important in the context of the current weakness in manufacturing surveys and falling hours. US industrial production is expected to fall by -0.1% in Dec (after a -0.2% decline in Nov). Rounding out commentary on the trajectory of the US economy this week will be US earnings.
US Fed speak; This is the last week leading up to the blackout period ahead of the FOMC meeting on 1 Feb. US Fed Vice Chair Brainard and Board of Governors member Chris Waller will both speak on the economic outlook this week. They may signal a slower pace of hikes.
The BoJ is not expected to change policy settings this week, but another adjustment can’t be completely ruled out. The BoJ is expected to review the functioning of the wider band around the 10yr yield target.
CPI data should show further easing in headline inflation rates; UK CPI is expected to ease slightly to +10.6% in Dec from +10.9% in Nov. Canada CPI is expected to ease to +6.3% in Dec from +6.8% in Nov. Euro area CPI for Dec is expected to be confirmed at +9.2%. Japan’s core CPI ex-fresh food (BoJ preferred measure) is expected to accelerate to 4% while core ex-energy & fresh food is expected to be little changed at +2.8% in Dec.
Markets will look through weaker data in the lead-up to China’s exit from the Covid-zero policy. Chinese Q4 GDP is expected to contract by -0.8% in Q4.
This week, the US Treasury will auction and settle approx. $409bn in ST Bills (including a CMB), Notes, and Bonds, raising approx. $107bn in new money.
The US Treasury will also auction the 10-Year TIPS and 20-Year Bond this week – to settle on 31 Jan.
Approx $14bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $19.6bn in Notes, Bonds, TIPS, and ST Bills will mature on the Fed balance sheet this week and will be redeemed/roll-off the Fed balance sheet.
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
