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
