by Kim | Sep 25, 2023
Key events this week – US PCE inflation, spending, housing, and growth, Fed speeches incl Fed Chair Powell, Euro Area & Aus inflation
Recap from last week
There was a further shift to a pause in policy hikes from central banks last week. The FOMC kept rates on hold while the BoE and the SNB both shifted to a pause. The BoJ remained the outlier by maintaining accommodative policy settings.
The FOMC kept rates on hold as expected, maintaining a higher-for-longer outlook for the FFR. Guidance was unchanged with the Committee retaining the option for additional policy firming this year, and penciling in fewer cuts next year, as outlined in the Economic Projections (SEP). The FOMC still sees inflation as too high and is not forecasted to reach targets for some time yet (the US core PCE is not estimated to reach the target until 2026). However, inflation is moving in the right direction, allowing some space to “act carefully” in determining the extent of additional tightening. The Committee wants to see more than three months of progress on inflation and a continued rebalancing of the labor market before it is confident inflation is on a sustainable path lower. Chair Powell noted that they are broadly watching whether the current stronger growth is a threat to the committee’s ability to get inflation back to target or undermine the rebalancing of the labor market. These factors will form part of the “totality of the data” assessment for future decisions. Chair Powell also noted several downside risks to growth going into this final quarter of 2023.
The more resilient US growth currently stands in contrast to concerns over slowing growth noted in other central bank decisions over the last few weeks. The latest was the BoE last week which kept policy rates on hold in another tight 5-4 decision. The Committee noted that policy will need to stay restrictive for “sufficiently long” to lower inflation, however, “some evidence is emerging that the economy is starting to respond”. The BoE noted recent increases in unemployment, inflation easing more than expected in Aug, and “the growth outlook less positive since the last meeting”.
The BoJ maintained its accommodative policy settings, noting “extremely high uncertainties surrounding economies and financial markets at home and abroad”.
The latest round of prelim PMIs for Sep showed growth momentum slowing among the G4 (plus Australia). Services activity has slowed through Q3 while manufacturing activity has remained in contraction. In the Eurozone, both services and manufacturing activity are now in contraction (with a notable deterioration in France this month). In Sep, services growth slowed, but remained moderate in Japan and slowed to a stalled pace in the US. Of note was the stronger fall in the UK services PMI this month, which also noted “solid” declines in staffing levels. In contrast, Aus services activity rebounded from contraction to a modest expansion.
Outlook for the week ahead
Data will focus broadly on US inflation, spending, and growth.
US PCE inflation for Aug is expected to follow the CPI report with a slight increase in the headline rate to +3.5% (from +3.3% in Jul) due to higher energy prices. The monthly pace is expected to increase to +0.5% from +0.3% in Jul. Core PCE is expected to ease to +3.9% from +4.2% in Jul. The monthly pace of core PCE inflation is expected to stay at +0.2%.
US personal spending is expected to slow to +0.5% in Aug from +0.8% in Jul, as personal income growth is expected to increase to +0.4% in Aug from +0.2% in Jul.
The third (final) estimate for US Q2 GDP growth is expected to come in slightly higher at +2.2%.
US new home sales are expected to moderate further to 0.700m (SAAR) from 0.714m in Jul. US housing data was mixed last week; home builder sentiment continued to fall, permits were higher, starts were sharply lower (led by a fall in activity in the West, likely weather-related), and existing home sales continued to fall. Existing home sales fell to 4.040m (SAAR) in Aug, which is now just above the pandemic low of 4m (Jan 2023).
US durable goods orders for Aug are expected to fall slightly by -0.4% after falling by -5.2% in Jul (due to large value orders in Jun).
There will be several US Fed speeches this week, including Fed Chair Powell (Town Hall event for educators).
Other data in focus this week will be the prelim Euro area CPI for Sep. Headline CPI growth is expected to slow to +4.6% in Sep (from +5.2% in Aug). Core CPI is expected to also ease to +4.9% in Sep (from +5.3% in Aug).
The monthly Aus CPI is expected to show inflation increasing slightly to +5.2% in Aug from +4.9% in Jul.
This week, the US Treasury will auction and settle approx. $577bn in ST Bills, Notes, Bonds, TIPs, and FRNs raising approx. $110bn in new money. This brings the unofficial Q3 quarter-to-date total of new money raised to approx. $1,038bn (Est was $1,007bn).
The US Treasury will auction the 2-year, 5-year, and 7-year Notes this week, and, together with the 20-year Bond, these will settle on 2 Oct next week.
QT this week: Approx $6.5bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $29.2bn in ST Bills, 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 | Sep 25, 2023
Last week equities broke impulsively lower as expected as rates pushed to new cycle highs. Global central banks continued to signal higher rates for longer, putting pressure on equities as we look for a hard test of equality targets and key 200 day sma support. Commodities traded sideways to down as economic growth expectations deteriorated […]
by Kim | Sep 18, 2023
Key events this week – Monetary policy decisions; FOMC, BoE, SNB, & BoJ, CPI: Eurozone, UK, Canada, & Japan, Prelim PMIs Sep
Recap from last week
We have previously noted that central banks have been shifting to a pause in the rate hiking cycle, having (hopefully) reached a sufficiently restrictive level of policy rates. Global central banks all appear to be following a similar risk management approach by retaining guidance that further tightening may still be required while inflation remains above target.
Last week, the ECB raised its policy rates by a further 25bps. The increase reflects the assessment that inflation remains too high. However, the also ECB signaled that it may join other central banks in shifting to a pause in the cycle. The ECB considers that growth is likely to stay ‘subdued’ in the coming months and that policy rates have ‘reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target’. The ECB maintained its data-dependent guidance – that decisions on rates would still be based on the assessment of the path of underlying inflation.
US data since the end of July is unlikely to have changed the expectation for a Fed pause this week. However, resilient growth and CPI data may be enough for the FOMC to keep a further hike in the dots. US CPI for Aug was as expected – with an acceleration in headline inflation due to higher energy prices. Core inflation measures suggest that progress on inflation likely slowed this month. Nominal retail sales were higher than expected with growth heavily influenced by higher gasoline prices in the month. In real terms, annual retail sales growth remained stalled. Slower growth in manufacturing output for Aug was led by a 5% fall in the output of motor vehicles (reversing the prior month’s increase). The NY manufacturing survey for Sep was a bright spot – pointing to some stabilization in the recent trend of weaker regional manufacturing conditions. This included a further improvement in outlook sentiment.
Outlook for the week ahead
The focus this week remains firmly on central banks and monetary policy meetings.
The FOMC is expected to stay on hold this month. The FOMC is likely to note; resilient US growth, some easing of tight labor market conditions, and progress on inflation, despite remaining too high. The dot plot will provide some insight into the expectation for the path of rates from here. Markets have also been pushing out the timing for rate cuts. Other US data out this week includes US housing construction data. Permits are expected to be little changed at 1.44m (SAAR), starts are expected to slow to 1.44m, and existing home sales are expected to improve slightly to 4.1m (from 4.07m SAAR). Initial claims are expected to stay low at +226k.
The BoE is expected to increase its policy rate by 25bps. The last decision was not unanimous, so there could be further disagreement this week. In the inter-meeting period, UK inflation has stayed high, there has been a further rise in unemployment, and growth momentum has slowed. The latest CPI report for Aug will be released before the BoE meets this week. Headline inflation is expected to increase to +7.1% in Aug (from +6.8% in Jul), with the monthly rate rising from -0.4% in Jul to +0.7% in Aug. Core inflation is expected to stay elevated at +6.8%.
The SNB will meet this week and is expected to raise policy rates by 25bps.
The BoJ will meet this week and is expected to keep policy settings unchanged. There has been some signaling by the BoJ in the inter-meeting period that it could consider a further adjustment to policy settings by year-end. The latest Japanese CPI report will be released before the BoJ announcement. The main measure of core CPI ex fresh food is expected to remain mostly steady at +3% in Aug, down slightly from +3.1% in Jul.
Other inflation data out this week includes the final release of the Eurozone CPI for Aug. Eurozone headline and core inflation is expected to be confirmed at +5.3%. Canadian headline CPI for Aug is expected to accelerate to +3.8% (from +3.3% in Jul) while the monthly pace is expected to slow to +0.2% from +0.6%.
Finally, the prelim S&P PMIs for Sep will provide the first view of growth momentum going into the final month of Q3. Momentum has been slowing among key G4 economies, led especially by services sectors in Europe, the US, and the UK. Weaker manufacturing conditions may be starting to stabilize.
This week, the US Treasury will auction and settle approx. $392bn in ST Bills raising approx. $44bn in new money. The US Treasury will also auction the 10-year TIPS and 20-year Bond this week and both will settle in the following weeks.
QT this week: Approx $2.7bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $2.7bn in ST Bills will mature on the Fed balance sheet this week and will be redeemed/roll-off the balance sheet.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Mofar2016 | Sep 18, 2023
Last week, equities rallied correctively before reversing sharply lower on Friday. Bond markets remain under pressure as a stronger US$ coupled with higher energy prices warn of a potential stagflationary environment going forward - key risk to equity markets. Will the goldilocks soft-landing trade be replaced by a stubbornly high cost-push inflation outlook? With the […]
by Kim | Sep 11, 2023
Key events this week – US CPI & retail sales, ECB policy meeting
Recap from last week
A theme of slower growth emerged in central bank decisions and data last week. Central bank policy decisions continued to favor pausing at this stage of the cycle to allow time for rate hikes to take effect. Although inflation is still too high, central banks are taking a risk management approach to policy settings by pausing hikes while retaining guidance that further tightening may still be required.
The BoC kept rates on hold last week. There was a notable shift in the characterization of the Canadian economy between the Jul and Sep meetings. From the Jul meeting; “Canada’s economy has been stronger than expected, with more momentum in demand”. At the Sept meeting last week, this was downgraded to; “The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures. Economic growth slowed sharply in the second quarter of 2023, with output contracting by 0.2% at an annualized rate.”
The RBA kept rates on hold last week, noting that rate hikes were working to bring “a more sustainable balance between supply and demand”. Changes to the statement suggest that the Board sees tight labor market conditions easing. GDP growth in Q2 was on par with that of Q1 at +0.4%. Much slower private sector consumption and investment spending was offset by public sector spending. The inventory drawdown was a large offsetting factor while net exports were stronger in real terms. Nominal GDP growth slowed due to the sharp decline in the terms of trade as domestic prices increased.
European GDP growth was revised lower in the final release for Q2. Growth in the Euro area and the EU slowed to a stalled pace in Q2. Broader Eurozone retail sales volumes resumed falling again in Jul after stabilizing since Apr. The Jul and Aug Eurozone PMIs point to further weakness in growth through Q3 so far. This slowdown in activity together with still high inflation will weigh on the ECB decision this week. The ECB is expected to keep policy rates unchanged.
US services surveys provided a limited guide on growth momentum into Aug. The S&P Services PMI for Aug indicated a more notable slowdown in services output activity. The ISM Services PMI suggested that growth in services activity was more widespread in Aug – yet the underlying shifts in the output and orders indexes indicated a mixed picture. The US Fed Beige Book report showed that most districts recorded ‘modest’ economic growth during Jul and Aug – led especially by tourism. The latest initial claims fell back to a low level of +216k.
Outlook for the week ahead
This week is the final US CPI and retail sales report for Aug ahead of next week’s FOMC meeting. The FOMC remains in data-dependent mode and the data this week will be important inputs into finalizing the assessment of the path of inflation and growth since the last meeting. US Fed Chair Powell has emphasized the importance of the “totality of the data” and is looking for “supply and demand through the economy coming into better balance”.
Inflation data could muddy the waters this week. US headline CPI is expected to accelerate in Aug to +3.6% (from +3.2% in Jul) due to higher energy prices. Headline CPI over the month is expected to increase by +0.6% in Aug (up from +0.2% in Jul). The focus will likely remain anchored on the path of core CPI which is expected to slow to +4.3% over the year from +4.7% in Jul (slowing due mainly to base effects). Over the month, core CPI growth is expected to stay at +0.2% in Aug, on par with the +0.2% increase in Jul.
US retail sales growth in Aug is expected to slow to +0.2% after increasing by +0.7% in Jul.
US industrial production growth is expected to slow to +0.1% in Jul from +1% in Jun. The NY Fed Empire State Manufacturing survey will provide the first insight into regional manufacturing conditions in Sep.
We are in the blackout period for Fed speeches ahead of the FOMC meeting next week.
The OPEC monthly report will be released on Tue 12 Jul.
The ECB will meet this week and is expected to keep policy rates on hold.
Aus labor market data for Aug is expected to show some improvement in Aug after a weaker report in Jul. Net employment is expected to increase by +26k in Aug after falling by -15k in Jul. The unemployment rate is expected to tick down to 3.6% (from 3.7% in Jul).
The remaining Chinese data for Aug will be released this week. New loans, industrial production, and retail sales are expected to show improvement.
This week, the US Treasury will auction and settle approx. $490bn in ST Bills, Notes, and Bonds raising approx. $121bn in new money.
QT this week: Approx $5bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $22bn in ST Bills, 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
