Key events this week – US CPI, retail sales, production, and housing data, UK CPI, RBA Governor Lowe’s testimony
Recap from last week
The stronger US nonfarm payrolls were a catalyst for a shift in the narrative last week. Markets have been digesting the stronger US labor market data, an expected increase in inflation this week, and growth that generally hasn’t been as bad as expected. Yields increased last week and the FFR futures are mostly back in line with projections provided at the Dec FOMC meeting.
In an interview during the week, US Fed Chair Powell noted that the disinflation process has started, but is in the very early stages and that the process will take time. Chair Powell does “expect significant progress on inflation this year and it’s our job to produce it”. So far, the disinflation process has not happened at the expense of higher unemployment.
The US senior loan officer survey for Q4 confirmed broadly tighter lending standards and lower demand for credit. The US consumer credit growth for Dec was notably slower. This was partly the result of lower growth of non-revolving credit linked to slower growth of motor vehicle sales in Dec (motor vehicle sales rebounded in Jan). Initial claims are still below 200k but NSA continuing claims appear to be edging higher. The Atlanta Fed wage growth tracker for Jan showed some easing in wage growth over the year, but the pace of growth remains elevated.
The RBA increased the cash rate target by 25bps to 3.35%. Inflation is high and Q4 core inflation at 6.9% was higher than expected. The labor market is tight, and unemployment remains at its lowest level since 1974. Rising rates are starting to impact household budgets and house prices. The guidance noted that “further increases in interest rates will be needed in the months ahead”. A key phrase, ‘rates not on a pre-set path’ was removed from the statement, and when previously added, it was thought to be a precursor to a pause in the hiking cycle.
RBA Governor Lowe has been criticized for earlier statements that rates wouldn’t increase until 2024. Household mortgage rates and payments are now resetting higher and community backlash has increased. This week, Governor Lowe will provide testimony in front of the Senate and House of Representatives economics committees.
Outlook for the week ahead
US CPI will set the tone for the week.
US Headline CPI in Jan is expected to slow to +6.2% over the year (from +6.5% in Dec). The monthly change in CPI is expected to increase to +0.5% in Jan (from +0.1% in Dec). Core CPI is expected to increase by +0.4% over the month, unchanged from Dec.
Other data this week may highlight some near-term improvement in US momentum. Monthly US retail sales growth is expected to rebound in Jan by +1.6% after falling -1.1% in Dec. Similarly, industrial production is expected to increase by +0.5% in Jan after a -0.7% fall in Dec. The first regional US manufacturing surveys for Feb will provide some insight into the persistence of weaker manufacturing activity. US homebuilder sentiment is expected to lift slightly. There will be several US Federal Reserve speeches during the week.
Inflation in the UK is expected to slow to +10.2% in Jan. Monthly CPI is expected to fall by -0.4%. UK labor market data will also be released this week.
The Aus labor market data for Jan will be released. Employment is expected to increase by +20k while the participation rate and unemployment rate are expected to be little changed at 66.6% and 3.5% respectively.
This week, the US Treasury will auction and settle approx. $400bn in ST Bills, Notes, and Bonds raising approx. $96bn in new money.
The US Treasury will also auction 30-year TIPS and 20-year Bonds this week. Both will settle on 28 Feb.
QT: Approx $53bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $32bn in Notes and Bonds will mature on the Balance sheet this week and will be redeemed/roll off the 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
