The Macro Outlook for w/c 4 September 2023

by Kim | Sep 4, 2023

Key events this week – RBA & BoC policy meetings, US ISM Services, Global services PMIs

Recap from last week

It was an important week of US data inputs helping to assess the path of the US labor market, growth, and inflation ahead of the next FOMC meeting this month. Data revisions played a prominent role in tempering the recent enthusiasm around resilient growth and a persistently tight labor market.

Payroll growth came in higher than expected for Aug at +187k despite the bankruptcy in transport and warehousing and several strikes. However notable revisions in the prior months suggest that payroll growth has not been as strong as previously thought. The 6-month average payroll growth is now down to +194k.

Several points indicate that labor market tightness may be easing. The participation rate increased more notably in Aug after several months unchanged but is still below the pre-pandemic peak of 63.3%. This led to a rise in the unemployment rate to 3.8% (also still historically low). Average hourly earnings growth continued to slow – now down to +4.3% over the year and +0.2% for the month. The JOLTS report for Jul, with revisions for May and Jun, suggested an accelerated slowdown in hiring, openings, and quits over the last two months. Hiring and openings are now mostly back in line with pre-pandemic levels. Layoffs & discharges remained low.

US growth indicators remained positive. Overall average weekly hours increased to 34.4 hours – led by goods-producing industries (mining & construction). The ISM manufacturing survey showed some improvement in manufacturing conditions, though still lacklustre. Anecdotes focused on weak orders growth; a function of unwinding inventories and backlogs, improving supply, and weaker demand.

US GDP growth for Q2 was revised lower to +2.1% from +2.4%. That was driven by fixed investment, change in inventories, and net exports making a smaller contribution to growth. Personal consumption growth was revised slightly higher. Still, the first view of Q3 PCE growth in Jul was stronger, increasing by +0.6% in real terms with both goods and services contributing to consumption growth. The updated Atlanta Fed GDP Nowcast for Q3 shows growth easing after the data from last week, but staying very high at +5.6% annualized.

Finally, there was little change in PCE inflation with both headline and core just slightly higher in Jul (due to base effects). Monthly inflation remained at a low +0.2% pace. So far, the headline and core measures of PCE inflation are within the range of FOMC projections provided at the Jun meeting. Headline PCE inflation in Jul of +3.3% is just above the median projection of +3.2%. Core PCE inflation in Jul was +4.2%, just above the median projection of +3.9%.   

Outlook for the week ahead

US data this week will focus on services activity surveys for Aug, factory orders for Jul, and non-farm productivity data for Q2.

The final global PMI’s for services will be released this week helping to round out the view of global private sector momentum in Aug. The PMIs released so far indicate that the slowdown in global manufacturing activity has eased in Aug.

This week, the RBA and BoC will meet on monetary policy. The RBA is expected to keep policy rates unchanged. The monthly inflation data for Jul continued to ease, but core inflation measures are still high and persistent. There had been some easing in labor market conditions in Jul with the unemployment rate increasing to 3.7%, despite a fall in participation. Governor Lowe will give a speech this week titled “Some Closing Remarks”. This will be his final meeting before the new RBA Governor, Michele Bullock takes over in mid-Sep. Aus GDP for Q2 will be released after the RBA board meeting and growth is expected to be +0.3%, up slightly from +0.2% in Q1.

The Bank of Canada is expected to keep policy rates unchanged at 5%. GDP growth in Q2 stalled (fell slightly on an annualized basis by -0.2%) after expecting annualized growth of +1.2%. Readings of core CPI continued to slow in Jul. The unemployment rate in Jul increased for the third month in a row as employment growth stalled and participation declined. The latest Aug labor market report will be released later in the week. Employment growth is expected to rebound by +18.7k and the unemployment rate to stay unchanged at 5.5%.

This week, the US Treasury will auction and settle approx. $433bn in ST Bills raising approx. $70bn in new money.

QT this week: Approx $6bnbn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $6bn 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