The Macro Outlook for w/c 6 February 2023

by Kim | Feb 6, 2023

Key events this week – Central bank speeches including Fed Chair Powell, RBA monetary policy decision.

Recap from last week

As expected, the FOMC increased the FFR target by 25bps. Guidance was unchanged and the main points were clear; “ongoing increases will be appropriate” and “it is our judgment that we’re not yet at a sufficiently restrictive policy stance”. The disinflationary process is at an early stage and more work needs to be done. Chair Powell noted that the ‘super core CPI’ highlighted in his Brookings speech was unchanged and sticky. The FOMC will need to stay the course, won’t loosen policy prematurely, and will likely need to maintain a restrictive stance for some time. Yet, markets saw a green light when Chair Powell did not push back (unlike at Jackson Hole) when asked whether recent easing in financial conditions would make the job harder to bring down inflation.

The significantly stronger non-farm payrolls for Jan quickly shifted the narrative. The Jan non-farm payrolls increased by +517k jobs – well above even the highest estimates. Most of the job gains were in services, but goods-producing payrolls also increased at an above-average pace. The unemployment rate remained low or little changed (25-54 years) despite a larger increase in participation (mostly across the core working age group). Other labor market indicators remained strong; job openings were higher, ECI growth slowed but remained elevated at +5.1%, and initial claims remained low despite larger layoff announcements. For now, the stronger labor market conditions provide scope for further tightening if inflation stays persistent.

The US ISMs for Jan were mixed. Manufacturing activity remained subdued while services activity rebounded strongly in Jan. Prices were stickier across both sectors this month.

The ECB and BoE increased rates by 50bps. The ECB signaled its intention to hike another 50bps in Mar before “evaluating the subsequent path of our monetary policy”. Euro area CPI eased back to +8.5% as energy prices continued to fall while core CPI accelerated to +5.2%. The BoE noted that if price pressure persisted, then further tightening in monetary policy would be required. Inflation in the UK remains extremely elevated but is expected to “fall sharply” over the rest of the year. This week, UK Q4 GDP growth is expected to be flat at 0% after falling by -0.3% in Q3.

The Jan global PMIs were more encouraging. The output contraction eased to only a subdued pace of decline. Manufacturing activity “moved closer to stabilization” and services activity rebounded, especially through the Eurozone. Input price inflation increased at a faster pace across both sectors, while optimism lifted regarding future output growth.

Outlook for the week ahead

A light data week.

Speeches by central bankers will feature in the outlook this week. US Fed Chair Powell will take part in a discussion at the Economic Club of Washington. Other US Fed speeches include Governor Waller, NY Fed President Williams, and Philadelphia Fed President Harker.

We will continue to watch high-frequency US data. Initial claims remain an important early indicator amid elevated job cut announcements. Claims are expected to increase slightly to +194k this week. Similarly, the recent bounce in mortgage applications reversed sharply last week (adjusted for the prior shorter holiday week) despite falling mortgage rates.

The RBA is expected to increase the cash rate by 25bps this week. Inflation accelerated in Q4, coming in higher than expected, while the labor market remains resilient. The RBA will stay concerned and vigilant over the impact of rising rates on household spending and housing.

Last week, the US Treasury borrowing requirement (net cash) for Q1 was increased notably from $578bn to $932bn. This increase is reflected in the higher issuance of ST Bills for the quarter. The estimated Net Bill issuance for Q1 was revised to $655bn (from $301bn) and the estimated Net Coupon issuance over the quarter remained unchanged at $277bn (prior was net $300bn). The expected cash balance at the end of Q1 was unchanged at $500bn. The revised higher issuance for Q1 was the result of a lower-than-expected cash balance at the end of Q4 2022 and a projection of lower tax receipts and higher outlays over Q1.

This week, the US Treasury will auction and settle approx. $279bn in ST Bills raising approx. $60bn in new money.

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

Approx $14.5bn 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