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
