The Macro Outlook for w/c 1 May 2023

by Kim | May 1, 2023

Key events this week – Central bank decisions; FOMC, ECB, and the RBA, US non-farm payrolls, Eurozone CPI, global PMI’s Apr

Recap from last week

Data continued to highlight slower US growth momentum while core inflation remained persistent.

US real GDP growth slowed notably in Q1 to +1.1% (expecting +2%). Growth has been slowing over the last two quarters and is expected to underperform given the stage of the tightening cycle. In Q1, personal consumption expenditure made a larger positive contribution to GDP growth, but this was offset by stalling inventory growth. The recent decline in domestic investment expenditure slowed, which was positive, partly due to a slower decline in residential investment. Net exports made a smaller contribution to growth even as both exports and imports increased over the quarter.

Inflation and wage growth pressures persisted into Mar. The headline PCE inflation slowed as energy prices continued to fall and food inflation also slowed further. But measures of core inflation were little changed at +4.6% in Mar (from +4.7% in Feb). The trimmed mean PCE inflation was unchanged at +4.7% in Mar highlighting that price pressures remain broad. As a measure of wage growth, the Employment Cost Index (ECI) growth accelerated slightly over Q1. Over the year, the ECI growth slowed to +4.8%.

The monthly PCE data places a question mark over the strength of US household expenditure growth in Q1 GDP though. The increase in the quarter was led mostly by the peak in Jan. Through Feb & Mar, real expenditure was flat to slightly down compared to Jan, suggesting a loss of momentum towards the end of the quarter. Expenditure growth was supported by real disposable income growth led by the large increase in non-farm payrolls in Jan, cost of living adjustments for transfer payments (Jan), wage growth, and slower headline inflation. Personal savings (surplus of income over spending) continued to recover over the quarter and to a greater degree in Feb and Mar. Some of these positive income effects may fade and there is likely some caution building amid negative news on the economy.

Despite the slowdown in growth, US initial claims show little sign of weakening yet with new claims falling last week to +230k (expecting a slight increase to +250k) while continuing claims were unchanged at the higher level. US new home sales increased more than expected and mortgage applications also increased.

Aus quarterly CPI showed inflation slowing but remaining elevated at +7%. It will likely be enough of a slowdown for the RBA to keep rates on hold again this month. Much of the disinflation to date has come from tradable/goods categories (petrol prices) while domestic/non-tradable inflation continued to increase.

Outlook for the week ahead

This will be a big week of central bank meetings and important economic data. These are the highlights for the week;

The FOMC is expected to hike rates again by 25bps. This will bring the FOMC in line with its SEP expectation of a peak in rates for this cycle. The FOMC may indicate a pause from here – balancing slower growth momentum and persistent inflation which will likely require rates to stay higher. Markets continue to price in cuts for later in the year.

US labor market data will feature this week, including non-farm payrolls at the end of the week. Payroll growth is expected to slow to +180k this month, while unemployment is expected to remain at a low of 3.5%. JOLTS data for Mar is expected to show a fall in job openings to 9.6m. This is effectively the FOMC soft landing scenario of slowing payroll growth without a meaningful rise in unemployment. The US ISM surveys for Apr this week will provide a view of growth momentum across manufacturing and services going into Q2.

The ECB is expected to increase rates by 25bps this week. The Euro area prelim CPI for Apr will be released before the ECB meeting. Headline inflation is expected to remain extremely high at +0.9% over the month, but slowing to +7% over the year. Core inflation is also expected to remain extremely high at +1.1% over the month and +5.7% over the year.

The RBA is expected to keep rates on hold as inflation begins to slow. RBA Governor Lowe will also speak after the board meeting at a scheduled event.

Global PMIs for Apr will be released this week, providing some broader context of growth momentum going into Q2.

This week, the US Treasury will auction and settle approx. $477bn in ST Bills, CMBs, Notes, FRNs, and Bonds, raising approx. $46bn in new money.

The US Treasury quarterly financing estimates for Q2 and Q3 will be released this week (1^st and 3^rd May).

QT: Approx $33.7bn 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