Key events this week – FOMC & RBA Minutes, RBNZ policy meeting, US PCE inflation, Japan & Canada CPI, prelim PMIs Feb
Recap from last week
US consumer price inflation came in as expected, with headline inflation slowing only slightly while underlying inflation remained sticky. Persistent inflation, together with stronger retail sales and payroll growth in Jan, was another data point adding to questions about more resilient momentum in the US.
US CPI slowed only slightly to +6.35% as higher energy prices added to inflation pressure this month. Core goods remained a larger disinflationary force – led by declining used car prices. Core services remained inflationary – led by rising shelter costs. Measures of underlying CPI showed the path of inflation remaining sticky. Notably, the Cleveland Fed median at +7% and trimmed mean at +6.5% showed little progress in reducing underlying inflation. The Jan CPI report confirms the FOMC’s concern about prematurely loosening policy. Rates markets continued to reprice a ‘higher for longer’ scenario. This was also stoked by hawkish rhetoric from Fed officials during the week.
But not all sectors line up with the softer landing narrative. US industrial production rebounded in Jan but is yet to break the weaker trend in output growth. The first regional manufacturing surveys for Feb showed continued weakness in orders and activity. In both surveys, hours worked were reduced, and employment in the NY Empire State survey contracted for the first time since the start of the pandemic. New home builder sentiment was stronger in Feb (off very low levels) – but hard to see that continue if mortgage rates shift higher again. The latest weekly mortgage applications reversed sharply lower as rates moved higher. US housing starts remained in a firm downward trend.
RBA Governor Lowe’s testimony noted that “there’s risks that we haven’t done enough” to tighten and bring down inflation. Employment in Jan was again weaker than expected and the unemployment rate increased from an all-time low to 3.7%. The RBA is looking through this weaker Jan report, citing data that more people than usual are waiting to start work in Feb. The RBA is expecting a strong rebound in employment in Feb, but if not, Governor Lowe noted that it “may force a rethink on the state of the economy”. The Aus Feb consumer sentiment reversed the Jan gains – sentiment on the state of family finances versus a year ago is now that the lowest level since the 1990s recession.
Outlook for the week ahead
It will be a big week of data to round out the near-term view of momentum.
US PCE inflation is expected to accelerate over the month to +0.5% with annual headline PCE inflation to slow to +4.9%. Personal income is expected to increase by +0.9% in Jan and spending by +1.3%. Initial jobless claims are expected to rise slightly to +200k.
FOMC minutes will be released this week. The FOMC reduced the hike to 25bps at the last meeting. Markets had reacted favorably to the message that disinflation was underway, and that there was little pushback over concern about easier financial conditions. Rates pricing has moved notably since then due to stronger data.
The RBA minutes will also be released this week. Some expected a pause at the Feb meeting, so the minutes may highlight more detail about the decision to hike and the thinking behind changes to the statement.
RBNZ monetary policy decision – markets are expecting a +50bps hike to 4.75%.
The Japanese core CPI ex fresh food for Jan is expected to increase to +4.2%. A confirmation hearing will take place later in the week for the new BoJ Governor nominee.
The latest prelim PMIs for Feb will provide insight into changes in growth momentum among the G4.
This week, the US Treasury will auction and settle approx. $335bn in ST Bills and FRNs with a net paydown of approx. -$3bn.
The US Treasury will also auction the 2, 5, and 7-year Notes this week. All will settle on 28 Feb.
QT: Approx $18bn 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
