Key events this week – US Retail Sales, US Fed Chair Powell, Central Bank speeches, RBA Minutes, global CPIs for Apr; Canada, Japan, Euro Area
Recap from last week
There was a small deceleration in annual US inflation for Apr. Inflation remains high with headline CPI growing at +5% and core CPI at +5.5%. The more recent 3mth and 6mth annualized time frame shows that headline inflation continues to ease. But this is less so the case for core CPI with recent time frames still showing persistent inflation pressure. Some of the underlying changes in the CPI were more positive this month with a further slowdown in the trend of the monthly shelter price growth. Will it continue? Slowing shelter price growth is central to most forecasts for overall slowing inflation.
The trimmed mean inflation has remained elevated through this cycle so far, suggesting that inflation pressure has been broad across expenditure categories. While the annual trimmed mean inflation rate slowed only slightly to +6.1% in Apr, the monthly rates have been slowing more consistently and the 3mth annualized rate is now down to +4.2%. This may indicate that broader inflation pressure has eased faster over the last few months.
But other data pointed to slower progress on inflation. Last week, the University of Michigan consumer inflation expectations over five years increased to +3.2% – the highest in over a decade. The Atlanta Fed wage data for Apr showed wage growth remained at an elevated level.
Was this CPI report enough for the FOMC to pause next month? Markets say yes for the moment – but there is still a lot of data before the next meeting. The challenge for the FOMC will be getting persistent inflation down to the 2% target without any further tightening and especially while the labor market remains tight.
Still, the first interest rate cuts remain priced in for Sep – indicating that the US economy is expected to weaken. Some data last week added weight to this outlook. Growth in initial claims shifted notably higher to +264k. But it was alleged that fraud was driving some of the increase in claims (Source; Bloomberg). The other report was the loan officer survey. While the survey showed no shift up to a ‘considerable’ tightening in credit conditions (resulting from the recent bank failures), credit conditions have continued to tighten and some demand for credit has slowed further. This provides a headwind for the growth outlook.
Outlook for the week ahead
The most recent US PMIs indicated that momentum improved somewhat in the US in Apr, so data this week will be about confirming that shift in momentum going into Q2. Retail sales growth is expected to increase to +0.7% in Apr, supported by stronger growth in motor vehicle sales. Overall US industrial production for Apr is expected to remain flat/weaker at -0.1%. The first regional manufacturing surveys for May will provide some insight into the trend in manufacturing activity. There will also be important housing data. Existing home sales for Apr are expected to slow to 4.3m (annualized rate), while home builder sentiment for May is expected to stay unchanged. New permits and starts for Apr are expected to be little changed.
There will be a lot of central bank-speak this week. This will include a discussion between US Fed Chair Powell and former Fed Chair Ben Bernanke on Friday. US Fed Vice Chair for Supervision Barr will also give two days of testimony.
More global inflation data for Apr will be reported this week. Canada’s CPI is expected to slow to +3.7% over the year, but increase to +0.9% over the month. Japan’s CPI ex fresh food is expected to stay elevated at +3.1%. The Euro Area headline inflation for Apr is expected to be confirmed at +7% over the year and +0.7% over the month.
Finally, the RBA will release the minutes of the last meeting, and this should provide insight into the decision to increase rates after deciding to pause at the prior meeting. The important Aus wage growth data for Q2 will be released and wage growth is expected to accelerate to +3.6% and by +0.9% QoQ. The Aus labor market survey for Apr will also be released and net employment growth is expected to slow to +25k, while participation (66.7%) and unemployment (3.5%) remain unchanged.
Headline risk around debt ceiling negotiations will remain elevated.
This week, the US Treasury will auction and settle approx. $436bn in ST Bills, Notes, and Bonds, raising approx. $31bn in new money. The US Treasury will also auction the 20-year Bond and 10-year TIPS this week – both will settle at the end of the month.
QT: Approx $48bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $29bn in Notes & Bonds will mature on the Fed balance sheet this week 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
