The Macro Outlook for w/c 9 January 2023

by Kim | Jan 9, 2023

Key events for the week ahead – US CPI, US Fed Chair Powell panel discussion

Recap from last week

Data continued to paint a picture of a reasonably robust US labor market despite slowing employment growth momentum. Growth in average hourly earnings slowed but highlighted the noisy nature of the ‘average’ as the prior month (Nov) was revised from an uncomfortably high (for the FOMC) +0.6% to +0.4%. The Dec month growth slowed to +0.3% as the annual growth slowed to +4.6% (expecting +5%). The FOMC will likely see this as a step in the right direction.

While payroll growth slowed to +223k, it is still above the level needed to absorb population growth (approx. +100k jobs). Employment growth in the household survey increased more notably for the month by +717k –  but was led almost entirely by part-time employed persons (+679k). Participation increased at the same time that the unemployment rate fell even further. The unemployment rate for the core working age group 25-54 years fell to 2.95% in Dec (from +3.27% in Nov). The 16yr+ unemployment rate fell to 3.47% (from 3.65% in Nov). The Nov JOLTS survey showed a slowing in openings and hires but layoffs and discharges remained near series lows – a good sign of resilience so far in this tightening cycle. But private sector hours and manufacturing overtime hours have started to decline, especially manufacturing overtime hours. This may be a precursor to future weakness in employment.

The fall in overtime hours is consistent with an obvious slowing in US manufacturing activity. US activity measured by the S&P and ISM PMIs deteriorated in Dec. The ISM manufacturing PMI contracted again while the ISM services PMI showed services activity slowing quite notably, falling from 56.5 in Nov to 49.9 in Dec.

The FOMC minutes reflected the decision to slow the pace of the Dec rate hike to 50bps. The stronger hawkish tone of earlier in the year has been softened as policy approaches a restrictive level; ongoing increases are still appropriate, inflation starting to ease but need to see more evidence of progress, the labor market is still tight, but “a couple” of participants starting to see the risks to the inflation outlook becoming more balanced and the risks of over-tightening versus under-tightening as becoming more balanced.

The S&P global PMIs for Dec showed a further fall in global manufacturing momentum. While the contraction in the Eurozone and Japan stabilized in Dec, momentum in other parts of Asia slowed, and the US contraction gained momentum. The S&P global services contraction stabilized at a modest level as momentum improved across Europe, Japan, and the UK. Again, the US contraction in services gained momentum

Outlook for the week ahead

The focus this week will be on US CPI for Dec. Headline CPI is expected to moderate further to +6.5% from +7.1% in Nov. Monthly CPI is expected to remain at +0.1%. US core CPI is expected to slow to +5.7% from +6% in Nov with monthly core CPI for Dec at +0.3%. Other inflation reports; Aus Nov (monthly) CPI is expected to increase to +7% from +6.9%. China’s CPI for Dec is expected to remain low at +1.8%.

Germany and Eurozone production data for Nov will provide some scale for the weakness in the manufacturing PMIs. Last week, German factory orders declined by over 5% in Nov.

US Fed Chair Powell is to take part in a discussion panel on central bank independence.

This week, the US Treasury will auction and settle approx. $228bn in ST Bills, with a paydown of $1bn.

The US Treasury will also auction the 3 and 10-year Notes and the 30-year Bond this week – all will settle next week.

Approx $14bn 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/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

The Macro Outlook for w/c 2 January 2023

by Kim | Jan 2, 2023

Key events for the week ahead – US non-farm payrolls, Euro Area prelim CPI (Dec), S&P global PMIs, FOMC minutes (TBC)

Recap from the last two weeks

The US PCE inflation report for Nov was released before the holiday break. PCE inflation slowed more than expected to +5.5% in Nov from +6.1% in Oct. Food inflation is still high – but the monthly food inflation trend continues to ease. Energy prices are volatile, but growth has slowed. Core goods disinflation is progressing as expected. The core services ex-housing component is what the FOMC is looking at to judge how inflation may develop from here;

“This is the largest of our three categories, constituting more than half of the core PCE index. Thus, this may be the most important category for understanding the future evolution of core inflation.” Source: US Fed Chair Powell –  Brookings speech, 30 Nov 2022

This measure of underlying inflation may have peaked in Oct, but remains elevated.

“Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category.“- US Fed Chair Powell – Brookings speech, 30 Nov 2022

Outlook for the week ahead

US labour market reports will be a key focus this week. With headline measures of inflation easing, the performance of the labour market is important in understanding how wages, underlying inflation, and the monetary policy outlook may evolve from here.

US non-farm payrolls for Dec are expected to increase by +200k (from +263k in Nov). This is still robust growth and above the estimated +100k growth required to accommodate population growth. The unemployment rate is expected to remain at 3.7% and participation at 62.1%.

Growth in average weekly earnings is expected to increase by +5% over the year (from +5.1% in Nov). For the FOMC, higher nominal wage growth reflects the ongoing imbalance between the supply of labour and demand for labour.

The Nov job openings are expected to fall to 10m in Nov (from 10.34m in Oct). The Oct JOLTS report showed falls in openings and hires (both below their 12mth averages, but openings remaining historically elevated). But this did not result in a corresponding increase in layoffs and discharges and both of these measures were still near series lows. Quits also remain elevated.

The weekly jobless claims data is an important high-frequency measure of the labour market. This week, initial claims (SA) are expected to increase by +230k (from +225k in the week prior). The current level of initial jobless claims is on par with the start of the year. The trend of the SA continuing claims series has been increasing steadily since Oct (after falling at the start of the year) and is now only 4.3% below the level at the start of 2022.

The FOMC minutes from the Dec meeting would usually be released this week – but is not yet scheduled on the Federal Reserve website.

The final global PMIs for Dec will be released this week. To recap, the G7 manufacturing PMIs remained in contraction. The contraction in Eurozone manufacturing slowed. Services output expanded in Japan, while services output in the UK shifted back to neutral, and the Eurozone services contraction slowed. The US S&P manufacturing and services PMIs contracted at a faster pace, falling to 46.2 and 44.4 respectively in early Dec.

This week, the US Treasury will auction and settle approx. $354bn in ST Bills, Notes, and Bonds raising approx. $35bn in new money.

Approx $13.6bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $2.8bn 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