Key events this week – BoE & RBA monetary policy meetings, US non-farm payrolls, US ISM surveys, Euro area CPI prelim for Jul, global PMIs for Jul
Recap from last week
Both the FOMC and ECB hiked rates last week but provided limited forward guidance. Despite recent improvements in inflation, neither central bank is claiming a victory over inflation, and both emphasized a data-dependent approach to future decisions.
The FOMC raised the FFR by 25bps to 5.25-5.5%. US GDP growth was stronger than expected for Q2 at +2.4%, unemployment remains low, and inflation appears to be moving in the right direction. Chair Powell noted that the Jun CPI was “a bit better than expected” but remained cautious that inflation is on a sustainable path to 2% and that the “process of getting inflation down to 2% has a long way to go”. The Sep meeting may or may not be “live”, depending on the inter-meeting data which includes two payroll and two inflation reports. On this, Chair Powell noted that the assessment for another hike in Sep would be based on the “totality of the data” specifically, growth, labor market conditions, and inflation.
On the growth front last week, US durable goods orders for Jun surprised strongly to the upside led by higher non-defense aircraft orders. This was somewhat supported by the flash US PMIs at the start of the week hinting at stabilizing manufacturing activity. Services growth was moderate but still slowed. The Jul flash PMI commentary was surprisingly downbeat with ‘gloomier business confidence’ noted.
US inflation for Jun was lower than expected as the PCE price index confirmed the improvement in the Jun CPI. While there are some base-year effects, the more recent annualized views confirm that near-term inflation continues to ease. Core inflation readings remain higher/still elevated – and this will stay a focus for the FOMC. The Employment Cost Index also came in slightly lower than expected at +1% for Q2, with the annual rate slowing, but remaining elevated at +4.5%.
The ECB hiked policy rates by another 25bps reflecting the current assessment of the inflation outlook. Inflation has started to ease over recent months, but the Governing Council noted that underlying inflation remains high. This was balanced against a deteriorating outlook for Euro area growth. The ECB bank lending survey noted tighter lending conditions and weaker demand for credit across sectors. Looking forward, the flash Euro area PMIs for Jul indicated a further deterioration in manufacturing activity as service sector momentum continued to ease.
The BoJ announced its intention to ‘flexibly’ manage the 10yr JGB trading band. The +/- 0.5% is now a reference rate, and the yield cap has been moved to +1%. The BoJ continued to signal that the achievement of its 2% inflation target “has not yet come in sight”. While fiscal 2023 inflation forecasts were increased, the BoJ revised its core forecast inflation slightly lower for 2024.
Outlook for the week ahead
Over the next two months, the ‘totality’ of US growth, inflation, and labor market data will be central in determining the next policy steps for the FOMC. The focus this week will be on the US labor market and growth momentum going into Q3. The first of the two important payroll reports for the US will be released this week. Non-farm payroll growth is expected to ease further to +184k in Jul (from +209k last month). At the same time, the unemployment rate is expected to stay at a low of 3.6%. The JOLTS report will for Jun will provide a broader context for the balance between labor supply and demand, with job openings expected to fall further to 9.6m The US ISM surveys will provide a view of manufacturing and services growth momentum going into Q3. Finally, the US Federal Reserve senior loan officer opinion survey for the latest quarter will be released. Chair Powell has already hinted at further tightening in lending conditions and weaker loan demand.
The RBA will meet this week. Market pricing for another hike moved much lower last week but some forecasters expect another hike. Quarterly headline inflation came in lower than expected but still elevated at +6%. Underlying inflation remained elevated at +5.9% and services inflation accelerated slightly to +6.3%. In a speech in Jul, Governor Lowe noted many cross-currents affecting the inflation outlook, and the Board is expected to provide an assessment of the inflation risks. Retail sales in Jun fell notably by -0.8%. The effect of higher rates on household consumption has been an important barometer for the RBA.
The BoE will meet this week and is expected to hike rates by a further 25bps.
Inflation and growth data for the Euro area will be in focus this week. The prelim Euro area CPI for Jul is expected to slow to +5.3% over the year and to +0.3% over the month. Core inflation is also expected to slow slightly to +5.4%. The flash Euro area GDP growth for Q2 is expected to increase by +0.2%, up from -0.1% in Q1.
Finally, the full suite of global PMIs for Jul will be released this week. Back in Jun, the growth momentum across manufacturing and services had started to slow. The flash Jul PMIs for the G4 plus Aus showed a continued slowdown in the pace of services growth. There was a slight improvement in manufacturing activity, despite all five headline manufacturing PMIs remaining in contraction territory.
This week, the US Treasury will auction and settle approx. $522bn in ST Bills, Notes, FRNs, TIPS, and Bonds raising approx. $41bn in new money.
Aug QT: Approx $17.5bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $31.4bn in Notes, Bonds, and FRNs will mature and roll off the Fed balance sheet (on 31 Jul).
US Treasury financing estimates for Q3 will be released this week.
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
