Key events this week – Inflation; US, Europe, and Australia, US Fed speak, China PMIs
Recap from last week
The recent turmoil in the banking sector did not stop central banks from raising rates again last week.
The FOMC increased the FFR by another 25bps last week to 4.75-5%. The FOMC made several changes to the statement, emphasizing that the US banking system is ‘sound and resilient’. The main theme is the effect of bank failures is expected to result in tighter credit conditions for businesses and households with a high degree of uncertainty about these effects. FOMC guidance changed to “anticipates that some additional policy firming may be appropriate” which means that potentially tighter credit conditions may be enough to help slow inflation without further tightening from the Fed. The summary of projections for the path of rates was little changed from Dec (the median was unchanged at 5.1%) – with rates projected to stay high this year (cuts weren’t the “base case” this year).
There is now a large discrepancy between where market pricing and the FOMC see the path of the FFR for this year. Market pricing (as of 27 Mar) has shifted to a pause in May and June and cuts in the FFR after that. The economic projections imply further growth weakness through 2023 – reflected in an increase in unemployment by the end of the year (this projection was mostly unchanged from Dec). We are yet to see a turn in the data. For example, US initial claims remained very low last week at +191k.
The BoE hiked rates by 25bps last week. Inflation increased unexpectedly in Feb, but ‘remains likely to fall sharply’ over the rest of this year. The BoE noted that ‘uncertainties around the financial and economic outlook have risen’.
The SNB also increased rates by 50bps to 1.50%.
The RBA minutes noted somewhat weaker domestic conditions in Q4, and that sluggish growth may have continued into Mar. The softer Jan labor market report played into this growth concern (but the stronger Feb labor market report reversed that weakness). The RBA expects that inflation peaked in Q4 2022 and the Board agreed to ‘reconsider’ the case for a pause at the following meeting (next week).
The prelim PMIs for Mar were encouraging. Across the G4, stronger growth momentum across services helped to offset stalled momentum in manufacturing. There was a notable acceleration in services momentum, especially in Europe (France & Germany) and the US. Headline manufacturing momentum remained weaker but there were some small signs of renewed output growth. In Australia, momentum across services and manufacturing slipped into contraction.
Outlook for the week ahead
More inflation data is out this week. US PCE inflation is expected to increase by +0.2% over the month and by +5.3% over the year to Feb. Core inflation is expected to remain little changed at +4.7% over the year.
Euro Area prelim CPI for Mar is expected to increase by +7.2% over the year from +8.5% as higher energy prices in the base month will see the headline rate fall. But core CPI inflation is expected to increase to +5.7% in Mar.
The monthly Aus CPI (a new series) is expected to slow to +7.1% in Feb (from +7.4%). Aus retail sales are expected to increase by +0.4% in Feb after the stronger +1.9% increase in Jan. Both reports will be important inputs for the RBA next week.
Fed (central bank) speak is back this week with several speeches on the economic outlook and monetary policy. There will also be two days of testimony from Vice Chair Barr on bank oversight.
A big week in US Treasury issuance to round out month and quarter end – including the addition of two CMB’s. This week, the US Treasury will auction and settle approx. $495bn in ST Bills, CMBs, Notes, Bonds, FRNs, and TIPS, raising approx. $133bn in new money. This brings the estimated net new money raised for the quarter to $657bn (Treasury forecast; $932bn).
QT: Approx $50bn in ST Bills, Notes, and Bonds will mature and roll off the Fed balance sheet this 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
