Key events this week – US PCE inflation, FOMC minutes, Prelim PMIs May, RBNZ policy decision
Recap from last week
In his speech last week, US Fed Chair Powell gave the strongest indication yet of a potential pause in the US rate hiking cycle. He noted that the stance of policy is restrictive and there are uncertainties regarding the lagged effects of the tightening done so far, including the additional tightening from recent “banking stresses”;
“Having come this far, we can afford to look at the data and the evolving outlook to make careful assessments,”
The justification to pause changes the focus to a forward-looking expectation that, due to long and variable lags, the full effect of policy tightening has yet to take effect (rather than a policy shift to a pause due to an obvious slowdown in the economy). After Powell’s speech last week, markets priced out the slightly higher probability of another hike in Jun.
Given that US inflation remains elevated, and the labor market remains tight, markets also started pricing out some of the near-term rate cuts and firmed up a pause through to Nov. US data last week showed the economy remained on a solid footing. US retail sales growth was positive albeit slower than expected – still reflecting a resilient consumer. Real retail sales have slowed and are shifting back toward the pre-pandemic trend. US manufacturing output growth was stronger in Apr, increasing by +1% over the prior month, led by motor vehicles, but also other durable & non-durable goods output. But the first two regional manufacturing surveys for May suggest some weakness in manufacturing could return. US housing activity, especially homebuilder sentiment, has continued to improve (led by the South and the West). Existing home sales were weaker in Apr. Importantly, the initial claims spike from last week was revised lower and claims fell back in line with the recent trend. Continuing claims remained stable.
Other global inflation data was mostly higher than expected. The BoC is still on a “hawkish hold” as Canadian headline inflation accelerated slightly to +4.4% in Apr and +0.7% over the month. The ECB has remained more hawkish with Euro area headline inflation confirmed at +7% in Apr and +0.6% over the month. Japanese CPI growth accelerated this month across headline and core measures. The BoJ preferred measure of inflation accelerated to +3.4% over the year with the monthly pace accelerating to +0.7% – the fastest monthly pace so far in this cycle.
The RBA minutes indicated that arguments were ‘finely balanced’ in deciding to hike by 25bps in May. After pausing in Apr, the Board was ultimately concerned about the upside risks to inflation and was buoyed by strong employment growth in Mar. The Aus data last week may weigh unevenly on the RBA decision next month; despite stronger than expected wage growth in Q1 of +3.7% (from +3.4% in Q4), employment for Apr was weaker than expected. The small decline in employment added to the increase in labor supply, resulting in a higher unemployment rate of 3.7% (from 3.5%). Signs of a weakening labor market will likely be a concern for the RBA.
Outlook for the week ahead
There will be continued headline risk from US debt ceiling negotiations this week and US Treasury Secretary Yellen is expected to provide an update on the ‘x-date’. Headline risk is likely to remain elevated, especially leading into the holiday long weekend.
US data will focus on inflation for Apr, housing, consumer income, spending, manufacturing, and growth momentum going into May. This will provide important input for assessing the path of the economy, amid expectations of an imminent slowdown. Headline PCE inflation is expected to ease slightly to +3.9% over the year while increasing over the month to +0.4%. Core PCE inflation is expected to be unchanged at +4.6% over the year. The final University of Michigan consumer sentiment reading for May will be released on Fri and will provide an update on the surprise spike higher in longer-term inflation expectations (up to +3.2%) reported in the prelim release.
There will also be several US Fed speeches throughout the week, including Governor Waller on the economic outlook.
The FOMC minutes of the May meeting will be released. This may provide some insight into discussions around the conditions for further hikes or for a pause in the hiking cycle. The minutes may also provide some insight into financial stability reports from staff.
The RBNZ will meet this week and it is expected to hike rates by another 25bps to 5.50%.
Finally, the prelim Global S&P PMIs will provide the first view of growth and activity momentum for May across key developed markets. The prelim May PMIs will be important in indicating whether stronger momentum, led mostly by services, has continued in Q2.
This week, the US Treasury will auction and settle approx. $322bn in ST Bills and FRNs, raising approx. $41bn in new money. The US Treasury will also auction the 2-year, 5-year, and 7-year Notes this week which will settle at the end of the month.
QT: Approx $14bn 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
