The Macro Outlook for w/c 7 August 2023

by Kim | Aug 7, 2023

Key events this week – US CPI

Recap from last week

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 last week was on the US labor market and growth momentum going into Q3. The Jul data continued to reflect a slowdown in hiring while the labor market remained tight/resilient. This labor market theme has also been evident across other developed markets.

US non-farm payrolls growth came in as expected around +187k, but the prior two months were revised lower by approx. -50k in total. At the same time, labor market conditions remained tight. From the household survey, the number of employed persons continued to increase (an increase in part-time employment more than offset the fall in full-time employment) while participation was unchanged. This resulted in another fall in the unemployment rate to 3.5%. The avg hourly earnings growth remained at +0.4% over the month and at a still elevated +4.4% over the year – consistent with tighter conditions. The US JOLTS data for Jun also reflected the underlying theme; demand for labor continued to ease as the rate of hiring and openings fell, but layoffs and discharges also declined.

The US services and manufacturing PMIs for Jul reflected the somewhat slower pace of hiring from the non-farm payrolls report. US manufacturing activity, which has remained lacklustre for many months, at best didn’t deteriorate further in Jul, but stayed in mild contraction. Services activity continued to expand modestly, but the pace of growth slowed. Services firms reported more widespread increases in prices this month.

Central bank decisions last week remained cautious on the inflation outlook, noting tight labor markets, and opting for data-dependent guidance. The RBA kept rates on hold to allow more time to assess the impact of the rate increases to date. Some further tightening of monetary policy may be required, and will depend upon the data and “the evolving assessment of risks”. The ‘evolving assessment of risks’ was an addition to the statement this month. The RBA continued to note that inflation was too high, and that services-led inflation remained persistent.

The BoE increased rates by a further 25bps as expected. Inflation risks remained skewed to the upside. The Committee noted that if “there were to be evidence of more persistent [inflation] pressures, then further tightening of policy would be required”.

Global PMIs for Jul continued to reflect slower growth momentum. Services activity growth remained moderate but slowed again. Global manufacturing activity continued to contract and at a slightly faster pace in Jul. This was led by further falls in output and orders, especially in the Eurozone and China. It’s worth noting that the global future output index for manufacturing continued to show reasonably widespread and improving sentiment in the outlook.

Outlook for the week ahead

US CPI for Jul will be the key data release this week. This will be the first of two inflation reports before the next FOMC meeting and will feed into the broader picture of economic activity for the FOMC. US Fed Chair Powell noted that while the Jun CPI reading was good and welcomed, it was only one reading and not a definitive view that inflation is on a ‘sustainable path’ back to the 2% target.

This week, US headline CPI for Jul is expected to accelerate slightly, due to base effects, to +3.3% from +3.1% in Jun. Inflation is expected to increase by +0.2% over the month versus +0.2% in Jun. Core CPI is expected to stay elevated at +4.7% in Jul, down slightly from +4.8% in Jun. Core inflation is also expected to increase by +0.2% over the month versus +0.2% in Jun.

We will continue to watch initial US jobless claims, which had shifted lower recently. This week, claims are expected to increase slightly to +230k from +227k last week.

This week, the US Treasury will auction and settle approx. $398bn in ST Bills raising approx. $53bn in new money. The US Treasury will also auction the 3-year and 10-year Notes and the 30-year Bond this week – these will settle next week.   

Aug QT: Approx $18.2bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested.

Also gaining much attention last week was the notably higher US borrowing requirements for Q3 and Q4. Details of the changes to the US Treasury net borrowing requirement for Q3 and Q4 are outlined in the briefing note attached.

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