by Kim | Aug 28, 2023
Key events this week – US non-farm payrolls, PCE Price Inflation, Euro Area CPI
Recap from last week
“As is often the case, we are navigating by the stars under cloudy skies.”
An obscure closing reference to the Jackson Hole symposium theme of structural shifts in the global economy contributing to the complexity of navigating policy in a post-pandemic world. For the most part though, US Fed Chair Powell’s speech at Jackson Hole reiterated the key messages from recent meetings while striking a cautious tone on the path forward. Inflation has come down from its peak, but still has “substantial further ground to cover”. Chair Powell emphasized again the risk management approach, noting uncertainties around the possible outcomes. Potential lagged effects of policy tightening may still be felt – complicating the task of balancing over-tightening and under-tightening. The FOMC will proceed carefully but is prepared to increase rates further if appropriate, and at least maintain policy at a restrictive level.
Questions remain over how restrictive current policy is given that US growth has remained resilient, and the unemployment rate remains at a low 3.5%. Chair Powell did note that additional evidence of persistently above-trend growth or evidence that labor market tightness was no longer easing could call for a monetary response. Since the Jackson Hole speech, markets have started to price the possibility of another hike in Nov.
US data last week was still mixed. The prelim US S&P PMIs for Aug indicated that private sector momentum continued to slow. Persistent manufacturing weakness was offset by positive, yet slowing services sector momentum. But the overall employment situation remained unchanged and sentiment in the outlook improved somewhat. US mortgage applications continued to show the effects of renewed mortgage rate increases as applications (leading) fell to the lowest level since 1995. Existing home sales in Jul missed expectations and are now only just above the Jan 2023 low. But new home sales increased more than expected in Jul. Initial claims continued to move lower after a recent spike higher. Durable goods orders fell as expected, reflecting the large-scale aircraft orders booked in the prior month. The Atlanta Fed GDPNowcast ticked up to +5.9% for Q3 (still limited data) as the change in inventories helped to offset the weakness in residential investment.
The prelim Aug PMIs for the G4 (including Aus) showed overall momentum slowing. Manufacturing activity was weaker in all markets this month, with output indexes below 50. Services momentum stalled with shifts to outright declines in Germany, France, the UK, and Aus. Services remained in expansion in Japan (accelerating) and in the US. Despite the weakening conditions, employment growth was mostly unchanged from the prior month – except for falls in Europe & UK manufacturing sectors. There were signs of renewed input cost inflation this month.
Outlook for the week ahead
This week will be important for assessing the path of the US labor market, inflation, and growth ahead of the next FOMC meeting.
US non-farm payroll growth is expected to slow further to +170k in Aug (from +187k in Jul). The unemployment rate is expected to stay unchanged at 3.5%. Job openings for Jul are expected to show a slight increase to 9.8m (up from 9.5m in Jun). Average weekly hours are expected to stay unchanged at 34.3. This will be the second of the two labor market reports before the next FOMC meeting.
US PCE inflation data will be released earlier than usual this week (Thur rather than Fri). Headline PCE inflation is expected to increase to +3.3% from +3% (base effects). The monthly pace is expected to stay at +0.2%. Core PCE inflation is expected to increase to +4.2% from +4.1% in Jul.
US personal spending in Jul is expected to be a robust +0.6% in Jul, up from +0.5% in Jun.
The second estimate of US Q2 GDP will be released and is expected to stay at +2.4%.
The US ISM manufacturing PMI for Aug is expected to stay in mild contraction.
The Euro area prelim CPI for Aug will be released, and headline inflation is expected to ease from +5.3% to +5.1% in Aug. Core CPI is expected to ease from +5.5% in Jul to +5.3% in Aug.
The broader release of the Aug PMIs will commence with global manufacturing activity later in the week.
Finally, the Aus monthly CPI series is expected to show a further slowdown in inflation to +5.2% in Jul (from +5.4% in Jun).
Next week is a short week in the US with the Labor Day Holiday on 4 Sep.
This week, the US Treasury will auction and settle approx. $542bn in ST Bills, Notes, Bonds, and TIPS raising approx. $111bn in new money.
QT this week: Approx $28bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $17.4bn in Notes and Bonds will mature on the Fed balance sheet this week and will be redeemed/roll-off the 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
by Mofar2016 | Aug 28, 2023
Global equity markets rebounded last week into overhead resistance as bonds held key swing support. This remains our key indicator - will rates break higher in a convincing wave (5) rally or will they pull back to continue a more complex wave (4) correction? Higher rates will likely be a strong headwind for global equity […]
by Kim | Aug 21, 2023
Key events this week – US Federal Reserve Annual Jackson Hole Economic Policy Symposium, Prelim PMIs Aug
Recap from last week
The FOMC minutes continued to emphasize that inflation is unacceptably high, and that policy will need to stay sufficiently restrictive. The minutes suggest that the FOMC may want to see growth slow (reflecting a better balance between aggregate supply and demand), and inflation ease, to feel confident that inflation is on a sustainable path to 2%;
Participants stressed that the Committee would need to see more data on inflation and further signs that aggregate demand and aggregate supply were moving into better balance to be confident that inflation pressures were abating and that inflation was on course to return to 2 percent over time. – FOMC Minutes
The shift to data-dependent guidance emphasized assessing the totality of the incoming data and the implications for the economic and inflation outlook. Policy tightening was seen as nearing its ‘destination’ and data in the inter-meeting period would determine the extent of additional policy firming that may be appropriate. The outlook also shifted as staff no longer judged that the economy would enter a mild recession by the end of the year. The minutes noted that risks to achieving the FOMC policy goals have become more two-sided, and the Committee would need to balance the risk of inadvertent overtightening with the cost of insufficient tightening.
Last week, US data on consumer spending, housing, and production suggested an even higher growth trajectory at the start of Q3. Retail sales growth for Jul came in stronger than expected at +0.8% with the prior month also revised higher. New housing permits and starts remained stable despite the higher rates environment. But homebuilder sentiment began to fall as mortgage rates increased to over 7%. Indicators of manufacturing and output were somewhat improved in Jul and several Aug surveys showed stabilization amid recent falls. Initial claims remained low. So far, the latest Atlanta Fed GDP Nowcast shows a notable acceleration in growth at the start of Q3.
Outlook for the week ahead
In the context of stronger US data and rising US long rates, the signaling from Fed Chair Powell at Jackson Hole will be important this week. The Fed is in data-dependent mode and there is still another round of inflation and payrolls data before the next meeting. This year’s symposium is on “Structural Shifts in the Global Economy” and US Fed Chair Powell is expected to speak on Friday morning.
The prelim Aug PMIs for key G4 markets will be released this week. These will provide some early insight into private sector growth momentum for Aug. Manufacturing in Jul showed ongoing weakness in the Euro Area while improving somewhat in the US. Services growth has broadly stayed positive while momentum has slowed over recent months.
Other US data this week will feed into the growth picture. Durable goods orders for Jul are expected to fall by -4% after much higher growth of +4.6% in Jun (led by large aircraft orders). Initial claims are expected to remain low at +244k. Existing home sales are expected to be little changed at 4.15m (SAAR).
This week, the US Treasury will auction and settle approx. $415bn in ST Bills and FRN’s raising approx. $94bn in new money. The US Treasury will also auction the 20-Year Bond and 30-Year TIPS this week – both will settle next week.
QT this week: Approx $13bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Mofar2016 | Aug 21, 2023
Last week, equities broke lower across the board as global rates continued to climb and pressure risk markets. The idea of higher rates for longer is putting pressure on long duration assets as investors continue to pare back positions given higher risk premia. The US$ strength continued into layered resistance as both industrial commodities and […]
by Kim | Aug 14, 2023
Key events this week – FOMC minutes, RBA minutes, and RBNZ policy meeting, US growth indicators; retail sales, housing construction, and industrial production, global CPIs; UK, Canada, Euro Area (final), and Japan
Recap from last week
Last week we continued to fill in more of the evolving picture of US growth, inflation, and labor market conditions leading up to the next FOMC meeting. US inflation in Jul (CPI) continued to ease amid tight labor market conditions, easing labor demand, and resilient growth. So far, the overall picture points to the likelihood of another pause at the Sep FOMC meeting.
Headline US CPI did accelerate slightly to +3.3% from +3.1% in Jun, but near-term measures show the inflation trend is easing. There was a further deceleration in core CPI – which provides a better signal of the overall direction of inflation. Core CPI increased by +4.7% in Jul versus +4.9% in Jun. Core goods inflation slowed to +0.9% over the year, as new and used car and truck prices declined. Core services prices continued to grow at +6.1%. The trimmed mean inflation slowed to +4.8% in Jul from +5% in Jun and the monthly change in trimmed mean inflation remains lower, around +0.2% (the avg of the last three months). This was overall a good inflation report for the Fed – the second in a row. Measures of core inflation are still elevated over the year, but slowing over the more recent periods. So far, continuing to go in the right direction.
Fed speak has been quiet over the last few weeks. Last week, NY Fed President Williams was signaling that maintaining a restrictive stance will be important, but if inflation is coming down, then it will be “natural to bring nominal interest rates down next year consistent with that, to keep the stance of monetary policy appropriate for an economy that’s growing, and for inflation moving to the 2 percent level.” This was in line with Fed Chair Powell’s last press conference comments – “if we see inflation coming down credibly, sustainably, then we don’t need to be at a restrictive level anymore, we can you know, we can move back to a neutral level and then below a neutral level at a certain point”. Both sets of comments note general caution around ensuring that inflation is coming down sustainably before a change in policy stance.
Data from China continued to disappoint. Weaker export and import growth reflected weaker global demand for goods and weaker domestic demand in China. Headline inflation declined by -0.3% over the year, while core inflation accelerated from +0.4% in Jun to +0.8% in Jul as the monthly core inflation rate increased to +0.5% – the fastest of the last twelve months. New loans in China were also a notable miss in the month – reflecting weaker domestic demand. Further data this week on retail sales, production, and investment.
Outlook for the week ahead
This week, we get US growth indicators on spending, housing construction, and production. US retail sales for Jul are expected to increase by +0.4% over the month, up from +0.2% in Jun. Housing data this week includes permits (expected to increase to 1.46m SAAR) and housing starts (expected to increase to 1.44m). Industrial production is expected to increase by +0.3% after falling by -0.5% in Jun. We will continue to watch initial claims, which came in slightly higher than expected last week at +248k. All of these data points should feed into a solid update of the Atlanta Fed GDPNowcast for US Q3 growth.
The FOMC minutes will be released this week. The FOMC hiked rates by 25bps at the last meeting. Minutes may reflect discussion around the inflation outlook and the need for data-dependent guidance. Fed speak looks to be minimal again this week, ahead of the Jackson Hole Symposium next week (24-26 Aug).
The RBA minutes will be released. The Board kept the cash rate on hold at 4.1% at this meeting. Previous minutes have revealed that decisions have been ‘finely balanced’, so it will be interesting to see how the rate hike debate has shifted. The Aus labor market survey for Jul will be released and net employment growth is expected to slow to +21k while the unemployment rate remains unchanged at 3.5%. The wage price index is expected to increase by +1% in Q2 from +0.8% in Q1. The increase in the minimum wage award came into effect from 1 Jul – strictly speaking in Q3.
The RBNZ is expected to keep policy rates on hold this week.
Finally, global inflation readings will be in focus throughout the week. Canada’s CPI is expected to increase by +2.7% in Jul (from +2.8%) with the trimmed mean slowing to +3.4%. UK CPI is also expected to slow to +6.8% in Jul from +7.9% in Jun, with core CPI staying around +6.8%. The final Euro area CPI for Jul is expected to confirm headline inflation at +5.3% and core inflation at +5.5%. Euro area services inflation had accelerated in the prelim release to +5.6% (and by +1.4% in the month). Finally, the Japanese National CPI is expected to slow to +2.5% in Jul with core CPI ex-fresh food slowing to +3.1%.
This week, the US Treasury will auction and settle approx. $482bn in ST Bills, Notes, and Bonds raising approx. $82bn in new money.
Aug QT: Approx $54bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested.
Approx $42.6bn in Notes and Bonds will mature on the Fed balance sheet and will be redeemed/roll off the 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
