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
