Key events this week – FOMC, ECB, and BoJ decisions, US PCE inflation, ECI & Q2 GDP, Aus CPI, prelim PMI’s Jul
Recap from last week
US data last week continued to reflect resilient results and little change in recent trends amid the higher rates environment.
US consumer spending remained positive in both nominal and real terms in Jun. Retail sales in Jun increased by less than expected by +0.2%, but sales growth in May was revised higher to +0.5%. The overall trend in retail sales (both nominal and real) has been easing but remains elevated and above the pre-pandemic trend.
US housing data remained mostly positive – especially for construction. Homebuilder sentiment stabilized in Jul. Permits came in lower than expected for Jun but still posted growth over Q2. New housing starts came in lower than expected in Jun and the stronger May result was revised lower – but new housing starts were still higher overall for Q2. Existing home sales were lower than expected in Jun at 4.16m (SAAR) and are now only 4% above the low of 4.0m in Jan 2023.
US manufacturing has been weaker and another fall in manufacturing output for Jun (-0.3%) confirmed recent softer survey results. While durable goods output growth has been modest (+0.8% over the year), this has not been enough to offset weakness in non-durable goods output which fell by -0.6% in Jun and is down -1.4% over the year.
Initial claims (SA) fell to +228k and were unchanged in NSA terms. There was a notable increase in continuing claims (NSA) for the week ending 8 Jul but this could be an effect from the 4th of Jul holiday.
Global inflation data was mixed. UK inflation did ease by more than expected with the annual headline rate falling to +7.9%. The monthly rate remained elevated at +0.8%. Canadian headline CPI eased by more than expected to +2.8% but was the result of a base-year effect from higher gasoline prices. The important core BoC measures of the trimmed mean, median, and common CPI showed little improvement in Jun compared to May. Annual headline inflation in Japan was up slightly to +3.3% in Jun, but monthly growth stayed low at +0.1%. Japanese CPI ex fresh food & energy remains at a near-term high of +4.2% – but stalled in the month at 0%.
Outlook for the week ahead
This week will be a big week of central bank decisions, growth, and inflation data.
The FOMC is expected to increase the FFR by a further 25bps this week. At this stage, markets are not pricing in another hike for this year. The FOMC will likely reiterate data dependence in its guidance. It will be important to see how the FOMC might change the way it frames the recent improvement in the inflation results. US GDP for Q2 is expected to slow to +1.7% from +2% in Q1. The latest Atlanta Fed GDP Nowcast has GDP growth running at +2.4% annualized in Q2. The important US PCE inflation data will be out later in the week and core PCE is expected to slow to +4.2% while headline PCE inflation is expected to slow from +3.8% in May. The employment cost index will also be released this week providing some insight into the pace of wage increases over Q2. The ECI is expected to increase by +1.1% in Q2 from +1.2% in Q1.
The ECB is expected to increase its policy rates by another 25bps, with a further hike expected later this year. The BoJ is expected to keep rates unchanged. It was reported late last week that BoJ officials see “little urgent need” to address YCC settings but “expect to discuss the issue (here)”.
The Aus quarterly CPI for Q2 will be released this week. Headline inflation is expected to ease from +7% in Q1 to +6.2% in Q2 and the trimmed mean is expected to slow from +6.6% to +6%. This CPI report will be an important input into the RBA assessment of the inflation outlook for its meeting and rates decision next week.
Finally, the prelim PMIs for Jul will be released. This will provide a timely update on shifts in the growth momentum of manufacturing versus service sectors among the larger developed economies. Growth in services has been a key driver of global growth momentum helping to offset weaker manufacturing activity.
This week, the US Treasury will auction and settle approx. $522bn in ST Bills, Notes, FRNs, TIPS, and Bonds raising approx. $46bn in new money.
QT Jul: Approx $11.4bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $33.6bn in Notes, Bonds, FRNs, and ST Bills will mature and roll off the Fed balance sheet (incl 31 Jul).
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
