The Macro Outlook for w/c 10 July 2023
Key events this week – US CPI, RBNZ and BoC policy decisions, central bank speeches
Recap from last week
Global yields moved higher last week within the context of the FOMC Minutes and the decision to pause hikes, recent hawkish speeches, and a series of better-than-expected data on the US economy.
The FOMC minutes detailed the decision to pause hikes, which was based on allowing more time to assess the progress of tightening done to date. However, “some participants” favoured another 25bps increase noting a tight labour market and “few clear signs that inflation was on a path to return to the Committees 2% objective over time”. While the FOMC is continuing to slow the pace of hikes, economic activity has been more resilient than expected. “Almost all participants” noted that further tightening would be “appropriate”.
The important US labour market data was mixed. There was some sign of easing demand for workers as payroll growth continued to slow in Jun, plus revisions lower in the prior two months. Job openings were also lower in May (still elevated though). Other data reflected continued tightness in labour market conditions with the unemployment rate staying low for 16yrs+, and falling for the 25-54yr group. Average hourly earnings growth remained elevated and average weekly hours increased. Initial claims, a coincident view of labour market conditions, increased again and the underlying trend has been rising, albeit slowly. The trend in continuing claims (which lags by a week), is now more mixed between the seasonally adjusted (slowing) and non-seasonally adjusted (rising) series.
The PMIs continued to show manufacturing and services conditions diverging at the end of Q2. The US ISM manufacturing PMI for Jun was only lower (in this cycle) at the depths of pandemic lockdowns. The underlying detail suggests that more manufacturing firms shifted to reporting ‘no change’ in activity compared to the prior month across the five key measures. In other words, recording lacklustre conditions. The ISM services PMI showed more widespread improvement in demand, output/activity, and employment. The global S&P PMIs reflected a similar situation. The global manufacturing PMI shifted further into contraction, while global services momentum slowed, but continued to signal a moderate expansion.
Outlook for the week ahead
The main focus this week will be on the US CPI report for Jun. This CPI report may take on slightly more importance given the recent move higher in yields. The CPI report for May provided some favourable signs of easing inflation. This month, headline inflation is expected to ease further to +3%, while core inflation is expected to stay elevated at +5% (down from +5.3% in May). Monthly core inflation is expected to slow to +0.3% from +0.4% in May.
There will be a few US Fed speeches this week. Of note will be Governor Waller on the economic outlook for the US and Fed Vice Chair for Supervision Barr on bank capital. The Fed will also release the Beige Book this week, providing an update on regional economic conditions.
The RBNZ will meet this week and is expected to leave rates on hold at 5.5%. The BoC will also meet this week and, after the stronger employment growth last week, expectations for a 25bps hike have increased.
Other speeches include RBA Governor Lowe will this week on the Reserve Bank review and monetary policy. The BoE Governor Bailey will speak this week, and the BoE credit conditions report will also be released this week.
This week, the US Treasury will auction and settle approx. $477bn in ST Bills, raising approx. $72bn in new money. The US Treasury will also auction the 30-year Bond and the 3-year and 10-year Notes this week – all will settle next 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
MCP Market Update: July 10th, 2023 – Near term risks
The Macro Outlook for w/c 3 July 2023
Key events this week – US non-farm payrolls, FOMC minutes, RBA rate decision, global PMIs
Recap from last week
The recent pulse of stronger-than-expected US data has cast doubt over the magnitude of the slow-down in the US economy. As recession expectations drift further out in the time horizon, central bankers reaffirm expectations for some further tightening.
The most notable data point last week was the final/third revision of US GDP for Q1. Growth was revised higher to +2% on stronger consumption expenditures, a smaller decline in fixed investment, and an improvement in net exports. Personal consumption expenditure was the largest contributor to growth – and the monthly breakdown shows that Jan was the standout month of growth during Q1. So far in Q2, growth in real monthly personal consumption expenditure has slowed but volumes have remained at a higher level. The latest Atlanta Fed GDPNow (updated 30 Jun) has US Q2 growth accelerating to +2.2%.
US housing continued to surprise with an especially large increase in new home sales for May (possibly revised over the next few months). Mortgage applications continued to rebound, increasing by +3% on the week. US durable goods orders for May showed stronger than expected growth across a range of industries making it difficult to align with recent weakness in manufacturing surveys. Finally, the recent rise in initial claims reversed in the latest week with claims coming back down to +239k.
Headline PCE inflation continued to moderate in May and is now within the range of the latest FOMC projections for the end of 2023. Core inflation is moderating more slowly. The disinflation in core goods prices seems to have stalled, while core services price growth slowed slightly. Underlying measures such as the trimmed mean and median (especially the median) remain elevated but are starting to show signs of moderation.
From Sintra, the message was that the major central banks ex-Japan, are staying hawkish with policy rates expected to rise further and remain higher. The persistence of inflation was a key theme of the panel discussion, as were tight labor markets. US Fed Chair Powell noted that it was surprising that inflation had been persistent “but the bottom line is that policy has not been restrictive enough for long enough”.
Outlook for the week ahead
With many central banks in data-dependence mode, inflation, labor markets, and growth data will remain important inputs. This week, US non-farm payrolls will be in focus and this will be the only labor market report before the next FOMC meeting. Non-farm payroll growth is expected to slow to +200k in Jun. Participation is expected to remain little changed at 62.2% while the unemployment rate is expected to be unchanged at 3.7%. Other US labor market indicators this week include the JOLTS report for May and the Challenger Job Cuts announcements for Jun. We will continue to watch initial claims (expecting +245k) and any flow through to changes in continuing claims.
The minutes of the latest FOMC meeting in Jun will be released. This should provide further insight into the decision by the FOMC to pause hiking while guiding expectations for possible further increases in the FFR. The FOMC remained concerned about the slow progress on core inflation.
The RBA will meet this week on monetary policy. There is some expectation for another hike to 4.35%, but it’s likely to be another ‘finely balanced’ decision. The monthly Aus inflation data (only a new series) was mixed last week. Headline inflation slowed more than expected, but the core/underlying inflation rates were unchanged in May, remaining at elevated levels. Retail sales growth in May was stronger than expected.
Finally, the full range of global PMIs for Jun will be released this week providing a broader view of global growth momentum. The prelim/flash Jun PMIs across the G4 economies had been somewhat disappointing.
This week, the US Treasury will auction and settle approx. $349bn in ST Bills, raising approx. $131bn in new money.
QT Jul: Approx $2.4bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $12.3bn in ST Bills will mature and roll off the Fed balance sheet.
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
