Key events this week – US Non-Farm Payrolls, Euro Area CPI May, Aus Monthly CPI
Recap from last week
The latest FOMC minutes showed uncertainty about the path of rates in the outlook and the extent to which further rate increases would be appropriate. Members noted the need for policy optionality. Views on the outlook diverged among committee members. Progress on reaching 2% inflation could be too slow so additional hikes could be warranted or, if the economy evolved according to some outlooks, then further policy firming may not be necessary.
Data so far had not ‘provided sufficient clarity’ for the policymaker’s next steps, so Governor Waller introduced a framework option for the next FOMC meeting; hike, skip, or pause. Skipping a meeting allows the Fed to hold rates, with the option to hike again, while maintaining a hawkish bias (given that progress on inflation is slow/stalling, and the labor market remains tight). Waller also noted that changes in credit conditions could be a deciding factor between hiking or skipping in June or July. One important factor could be the resolution of the debt ceiling and the resulting rebuild of the Treasury cash account tightening financial conditions.
By the end of the week, markets had priced in another US hike for Jun with cuts still commencing in Nov or Dec. This repricing was also in part due to the stronger US PCE inflation reading for Apr across headline and core measures, faster consumption growth in Apr, improvement in real disposable income growth, initial jobless claims that were revised lower, an increase in new home sales, and an acceleration in the May PMI activity led by services.
The prelim global PMIs for May were mixed. The headline manufacturing PMIs recorded a fourth month of slowing momentum, with Japan the exception. The US manufacturing PMI slipped back into contraction while output growth stayed positive. Services growth remained moderate, but momentum stalled across Europe, the UK, and Aus, while growth continued to accelerate in Japan and the US. The broader release of the May PMI’s will commence this week.
Outlook for the week ahead
The next FOMC meeting is 14 Jun, meaning this is the last week before the blackout period for that meeting. There are several Fed speeches scheduled this week with possibly more to be added. The US labor market data this week will be important as the FOMC determines the path forward for policy.
US non-farm payrolls for May are expected to increase at a slower pace of +180k (prior +253k). Participation is expected to remain unchanged while the unemployment rate is expected to increase slightly to 3.5%. Job openings for Apr are expected to fall to 9.3m (from 9.6m). The ISM manufacturing PMI will be released this week along with the Fed’s Beige Book overview of regional activity.
Other inflation data will be important this week. The Euro Area prelim CPI reading for May will be released and headline CPI is expected to remain elevated at +7% while core inflation is also expected to remain elevated at +5.5%. The ECB minutes will also be released this week.
Aus monthly inflation for Apr is expected to edge below +7%. RBA Governor Lowe will provide testimony this week ahead of the RBA meeting next week.
This week, the US Treasury will auction and settle approx. $431bn in ST Bills, Notes, Bonds, and TIPS, raising approx. $100bn in new money.
QT end of May/start of June: Approx $40.3bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $33.6bn in Notes, Bonds, and ST Bills will roll off the Fed balance sheet.
A deal to suspend the debt limit (through Jan 2025) has been reached. Details are now going into draft legislation with a vote expected around midweek. The estimated X-date was updated to a likely 5 Jun 2023.
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
