by Kim | Apr 24, 2023
Key events this week – US PCE inflation & ECI Q1, Aus CPI, US & Euro Area flash GDP Q1, BoJ Meeting
Recap from last week
Data painted a mixed picture of US growth momentum at the end of Q1 going into Q2.
The US Fed Beige Book survey contained anecdotes of stagnant growth between Mar and Apr among the Federal Reserve Districts. Three districts reported modest growth while nine reported no change. Of note was the varying experience of tighter lending and credit conditions since the recent bank failures. The first US regional manufacturing surveys for Apr were mixed. The NY Fed manufacturing survey recorded a stronger rebound, while the Philadelphia Fed survey reflected continued weakness in manufacturing activity. US housing data for Mar indicated a stall in the recent momentum across existing home sales, new permits, and starts. Homebuilder sentiment was little changed going into Apr, remaining low. Mortgage applications weakened further last week, retracing the prior five weeks of gains. Initial claims increased slightly to +245k, remaining within the higher, but sidewards trend, while continuing claims increased further.
In stark contrast were the flash PMIs for Apr. Across the G4 generally, the expansion in services growth that started in Feb strengthened further in Apr. This helped to offset some weakness in manufacturing, especially across Europe, the UK, and Aus. The US flash PMI for Apr showed stronger momentum across both manufacturing and services sectors as growth in output, inflation, and employment were more widespread.
Despite the mixed data messages, markets continued to price in a further rate hike at the May FOMC meeting next week. Rate cuts priced in after the recent bank failures have now been shifted further out to Nov.
Inflation remained persistent. Japanese core CPI surprised to the upside at +3.8% – a peak not seen since the 1908’s. UK CPI surprised to the upside for Mar at +10.1% and core at +6.2% (plus a strong labor market report). Inflation in Canada was mostly as expected while NZ CPI growth was lower than expected at +6.7%.
The RBA minutes outlined the case for a pause in hikes for at least one meeting. The minutes noted that policy could still be tightened further and that the pause would allow time to assess more data – especially the next quarterly inflation report this week (26 Apr), another labor market report, and updated staff forecasts. The minutes suggest that this data would be important in assessing the need for further tightening.
Outlook for the week ahead
Its a full week of US data across inflation, manufacturing, housing, growth, and the US consumer – ahead of the FOMC meeting next week. The US PCE inflation for Mar is expected to slow to +4.6% (from +5% in Feb), as core inflation is expected to remain little changed at +4.5% in Mar (+4.6% Feb). The important employment cost index for Q1 is expected to increase by +1.1% over the quarter (up from 1% in Q4). The flash US GDP growth for Q1 is expected to slow to +2% (annualized) from +2.6% in Q4. Also; durable goods orders, more regional manufacturing surveys for Apr, new home sales, and personal spending & income for Mar.
The latest Aus quarterly CPI report will be an important input for the RBA meeting next week. The quarterly CPI for Q1 is expected to show inflation slowing to +6.9% from +7.8% in Q4. Trimmed mean inflation is expected to stay elevated at +6.7% (from +6.9% in Q4).
The BoJ will meet this week – the first meeting led by Governor Ueda. There is speculation that the BoJ will review its policy approach – but not likely at this meeting. A full update on BoJ forecasts will be released and the framing around rising core inflation will be important.
This week, the US Treasury will auction and settle approx. $257bn in ST Bills and TIPS, with a net paydown of $1bn.
The US Treasury will also auction the 2yr, 5yr, 7yr Notes, and the 2yr FRN this week – to settle next week.
QT: Approx $29.8bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $43.5bn in Notes and Bonds will mature on the Fed balance sheet (30 Apr) and will be redeemed.
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
by Mars Capital Partners | Apr 24, 2023
US equity markets continue to stall at resistance with no strong evidence of a bearish reversal. While resistance is resistance until proven otherwise, the benchmark SPX would still look best with a final wave (iv) and (v) push to new swing highs to complete blue wave C (preferred count). This would align with another wave […]
by Kim | Apr 17, 2023
Key events this week – Global inflation (UK, NZ, Japan, Canada, Euro area final CPI), RBA & ECB minutes, prelim PMIs, US housing
Recap from last week
The FOMC minutes reflected the decision to increase rates by 25bps despite heightened uncertainty stemming from several high-profile bank failures. While a pause in hikes was considered, the Committee ultimately decided to increase rates because of elevated inflation and the strength of recent economic data. The minutes also noted slower-than-expected progress on disinflation and the uncertain nature of the disinflationary process.
“…upside risks to the inflation outlook remained a key factor shaping the policy outlook, and that maintaining a restrictive policy stance until inflation is clearly on a downward path toward 2 percent would be appropriate from a risk-management perspective.” FOMC Minutes, 21-22 Mar
Actions taken by the central banks had calmed conditions in the banking sector and lessened the near-term risks of a shock to the economy. But the extent to which credit conditions might tighten was still regarded with a high degree of uncertainty. Some participants noted that given the stronger data and persistent inflation, and in the absence of banking sector issues, would have considered a 50bps increase – but judged it prudent to only go 25bps at this time.
US CPI growth continued to ease, slowing to +5% over the year, while measures of core inflation remain elevated and persistent at +5.6% in Mar (+5.5% in Feb). Similarly, the Fed’s ‘super core’ measure was little changed. The key issue is that the disinflation process has stalled over the last few months. But there were several encouraging signs with housing and food price growth easing over the month. The trimmed mean inflation rate slowed again, and more notably over the month. This suggests that inflation pressure may be starting to come from a narrower base of goods & services. But annual trimmed mean inflation is still extremely elevated at +6.2% (+6.5% in Feb).
Other US data showed some softening in momentum. US retail sales growth slowed more than expected by -1% in Mar (-0.2% Feb). In real terms, the annual growth of retail sales has averaged 0.1% over the last 12 months. This month was the first more notable year-on-year decline of 1.9% in real terms. US initial claims remained elevated at 239k – a higher level since the adjustment revisions.
Late in the week, Fed Governor Waller’s speech provided some guidance on the Mar inflation report. Despite slowing housing costs, core inflation had just moved sideways without an “apparent downward trend”. He noted that “we haven’t made much progress on our inflation goal”, leaving him “in about the same place on the outlook at the last meeting, and on the same path for monetary policy”. Policy may need to be tightened further, and the implication of slow progress on inflation was that policy “will need to stay tight for a substantial period, and longer than markets anticipate”. Since the speech, FFR probabilities have been firming for another hike in May, coming back more in line with FOMC projections.
Outlook for the week ahead
More key inflation reports will be released this week. Inflation in Canada is expected to ease to +4.3%. Inflation in the UK is expected to remain elevated at +9.8%. NZ inflation for Q1 is expected to remain elevated at +7.1%. Inflation in Japan is expected to ease but core inflation is expected to stay high at +3.4%. Euro area CPI (final) is expected to be confirmed at +6.9% for Mar.
The RBA and ECB minutes will be released this week. The RBA minutes will reflect the discussion around the decision to pause hikes. The Australian Treasurer has confirmed that the review of the RBA and its operations will be released “in the next week or two”. There will also be a host of Fed and other central bank speeches this week.
Key growth data out of China will be released this week with Q1 GDP and industrial production and retail sales for Mar. Chinese Q1 GDP is expected to increase by +4% year over year.
In the US, the focus will be on housing data for Mar. Recent mortgage application data has reflected some firming in conditions. That said, housing data is expected to be little changed for Mar (SAAR basis); Existing home sales are expected to be 4.50m, permits 1.45m, and starts 1.40m.
At the end of the week, the prelim S&P PMIs will provide the first view of growth momentum for Apr among the G4 economies. The Mar PMIs showed stronger growth momentum across services, helping to offset weaker manufacturing momentum.
This week, the US Treasury will auction and settle approx. $375bn in ST Bills, Notes, and Bonds, raising approx. $8bn in new money. The 17-Day CMB (settled 31 Mar) will mature on 17 Apr, with a paydown of $45bn. This brings the total paydown for the week to $37bn.
The US Treasury will also auction the 20-year Bond and 5-year TIPS this week.
QT: Approx $25.1bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $16.5bn in Notes and Bonds will mature on the Balance sheet (15 Apr) and will be redeemed.
Its also Tax Day on 18 April.
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
by Mars Capital Partners | Apr 17, 2023
Risk assets continue to squeeze higher as inflation pressures ease and growth stabilises. We continue to see this equity market rally as an ending wave prior to the resumption of the big picture bear market. We expect growth and inflation risks to be overwhelmed by increasing default and credit risk in this over-levered financialised world. […]
by Kim | Apr 11, 2023
Key events this week – US CPI & retail sales, FOMC minutes, BoC meeting, Aus labor market survey, US bank earnings
Recap from last week
While momentum in US labor market growth continues to slow, conditions remain tight. US non-farm payrolls increased by +236k in Mar. Payroll growth remained tilted to services-providing jobs, which increased by +196k, while goods-producing payrolls declined slightly by 7k. Govt payrolls increased by 47k. Overall growth in payrolls is still elevated compared to the pre-pandemic trend.
Employment growth (among 16yrs+) was high enough to absorb the increase in the participation rate and still reduce unemployment. The unemployment rate edged lower to 3.5%. Hours growth was slightly lower in Mar. Growth in average hourly earnings continued to moderate. The Feb JOLTS data reflected the slowing growth trend. Job openings continued to moderate with the opening rate easing to 6.0 in Feb, which is still well above the pre-pandemic average rate of 4.2. But hires continued to outpace separations helping to keep unemployment low. Growth in initial claims has lifted over the last few months (after the revision last week).
The US ISM surveys for Mar reflected further weakening in manufacturing momentum and moderate, yet slowing growth across services.
Market pricing for the path of US rates shifted after last week’s data (although shortened holiday session). Markets are now pricing one more hike to 5-5.25% in May, then a brief pause before pricing the first rate cut in July. This is still a point of tension with FOMC projections. Conditions would need to deteriorate notably in the few months ahead for the FOMC to take this path, with the FOMC noting that “cuts are not the base case” for 2023.
The RBA kept rates on hold to allow time to assess the effect of rate increases on the economy, amid heightened uncertainty. The statement noted that rate increases, higher inflation, and a fall in housing are starting to lead to a “substantial slowing in household spending”. With inflation still elevated and a tight labor market, the Board may consider further tightening if needed. Governor Lowe noted later in his National Press Club address that Aus mortgage rates had increased more than most other countries despite a lower cash rate.
RBNZ surprised markets with a 50bps increase, citing inflationary pressure and employment ‘beyond its maximum sustainable level’.
Global PMI’s reflected ongoing lacklustre manufacturing momentum while global services growth continued to expand, notably across China, the Eurozone, and Japan.
Outlook for the week ahead
US CPI and retail sales will be the important inputs providing a guide on consumption growth and inflation leading up to the next FOMC meeting. Headline US CPI for Mar is expected to moderate to +5.2% as data starts to cycle over the higher base from last year. The monthly pace is expected to slow to +0.2%. Core inflation though is expected to remain elevated, accelerating slightly to +5.6% in Mar with the monthly pace around +0.4%. US retail sales are expected to fall by -0.4% in Mar. The FOMC minutes will be released this week and should reflect discussion around expectations for further tightening of policy versus a market-based tightening in credit conditions related to recent bank failures.
The Bank of Canada is expected to keep rates on hold as previously signalled.
Finally, the Aus labor market survey for Mar will be released. Employment growth is expected to slow to +20k. The participation rate is expected to stay unchanged at 66.6% while the unemployment rate is expected to increase slightly to +3.6%.
This week, the US Treasury will auction and settle approx. $251bn in ST Bills with a paydown of approx. $9bn.
The US Treasury will also auction the 30-year Bond and 3 and 10-year Notes this week.
QT: Approx $19.4bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $16.4bn in Notes and Bonds will mature on the Balance sheet (15 Apr) and will be redeemed.
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
