by Kim | Oct 30, 2023
Key events this week – FOMC, BoJ, and BoE monetary policy decisions, US non-farm payrolls & ISM surveys
Recap from last week
The prelim release of US Q3 GDP did not disappoint last week. Real GDP growth in Q3 was higher than expected at +4.9% (annualized basis). Even nominal GDP growth accelerated to +8.5% (annualized) in Q3. The acceleration in real GDP was led by growth in personal consumption expenditures across both goods & services (the Sep monthly PCE was stronger than expected at +0.7%), a larger change in inventories, and growth in government expenditure. Private investment spending slowed.
US PCE inflation for Sep showed little improvement in the headline rate, with inflation stalling at +3.4%. Core PCE inflation slowed to +3.7% but picked up over the month to +0.3%. Price growth of core goods continued to moderate (used cars) while core services inflation has remained more persistent at +5% (shelter). Across a range of inflation measures (trimmed mean, median, and headline), the monthly trend of inflation is showing a slight re-acceleration. The final University of Michigan consumer inflation expectations for Oct stayed higher with year-ahead inflation expectations revised higher to +4.2%.
To round out the ‘totality of the data’ ahead of the FOMC meeting this week; US data has been consistently ‘better than expected’ through Q3. This has been across retail sales & consumption growth, non-farm payrolls, the moderate improvement in manufacturing conditions, and the overall acceleration in Q3 GDP growth (prelim). However, short-term indicators show higher rates impacting mortgage applications and some parts of the housing market. There has been slower, ‘less encouraging’ progress on inflation recently. The FOMC meets this week and is unlikely to change its stance from “proceeding carefully” and is expected to keep policy rates unchanged. As noted last week, Fed speeches questioned the degree to which economic growth may moderate from here given the recent “significant tightening of financial conditions” resulting from higher long-term bond yields. Guidance from the FOMC will be important this week. Another hike may not be off the table – but the bar for another hike is likely to be higher. Fed speeches noted that if growth stays strong AND, even if inflation just stabilizes here, then that could form the basis for more tightening by the FOMC.
The BoC and ECB kept policy settings unchanged last week. The BoC remained concerned over inflation, noting that some “inflation risks have increased”.
Aus Q3 headline inflation slowed to +5.4% in Q3 (from +6% in Q2). The larger-than-expected increase in the quarterly rate to +1.2% was notable – led by faster growth in housing, transport (fuel), alcohol & tobacco, food, and insurance prices. The trimmed mean (RBA preferred measure) also accelerated over the quarter to +1.2% and slowed to +5.2% over the year. Since the CPI release, markets have been pricing in a higher probability (close to 50% on 27 Oct) that the RBA will increase rates by a further 25bps by Feb 2024. The RBA meets next week.
The prelim Oct PMIs for the G4 (plus Australia) showed a slowdown across service momentum while manufacturing PMIs were broadly unchanged staying in moderate contraction. Services output slipped to just below the 50-expansion level – due to a further deterioration in the Eurozone and a shift back to a contraction in Aus. Conditions in the US were the standout of the report with both services and manufacturing output growth improving.
Outlook for the week ahead
There will be several important areas of focus this week.
The first will be central bank policy decisions. Broadly, the global rise in longer-term yields is likely to weigh on most central bank decisions at this stage. The BoJ is expected to keep policy settings unchanged. However, there have been news items suggesting (signaling) that adjustments to policy settings are under consideration. The updated outlook report will also be released and there may be scope for changes to the inflation outlook.
The FOMC is expected to keep policy settings unchanged. As noted above, guidance will be important.
The BoE is also expected to keep policy rates unchanged. The last policy decision to keep rates on hold was not unanimous due to high inflation and the weakening momentum of the real economy. The decision this week could also be finely balanced.
The second area of focus will be data. The key economic report for the US will be non-farm payrolls and the broad update of US labor market indicators for Oct. US non-farm payrolls are expected to increase by +182k (from +336k in Sep). The unemployment rate is expected to stay unchanged at 3.8%. The employment cost index (ECI) for Q3 is expected to show no change in the pace of employment cost growth of +1% over the quarter. The JOLTS survey for Sep is expected to show a slowdown in the number of job openings to 9.3m. The US ISM surveys for Oct will provide a detailed view of momentum going into Q4 – manufacturing activity is expected to stay at a stalled pace while services momentum is expected to slow.
In Europe, the prelim CPI for the Euro Area is expected to show further progress on slowing inflation in Oct. Headline inflation is expected to slow to +3.2% in Oct from +4.3% in Sep. Core CPI is expected to stay elevated at +4.2%, but still moderate from +4.5% in Sep. The Eurozone prelim GDP is expected to contract slightly by -0.1% in Q3.
The full suite of global S&P PMIs will be released this week for Oct. This will provide a broader view of global private sector momentum going into Q4.
Finally, geopolitical risk and uncertainty remain elevated this week.
This week, the US Treasury will auction and settle approx. $700bn in ST Bills, Notes, Bonds, TIPS, and FRNs raising approx. $114bn in new money.
QT: Approx $22bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $39bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be redeemed/roll-off the balance sheet.
The latest US quarterly refunding announcement will be made this week. Announcements regarding the financing requirements for Q4 2023 and Q1 2024 (estimate) will be made on 30 Oct and further details will be released on 1 Nov this week. 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 | Oct 30, 2023
Last week global equities extended recent declines into 5 waves to help confirm the bigger picture bearish change in trend. Importantly, the benchmark SPX / ES declined so far as to overlap its wave 1 / A high and confirm a corrective 3 wave rally from the October 2022 lows. The bears have taken control […]
by Kim | Oct 23, 2023
Key events this week – US PCE inflation & Q3 GDP, Fed speeches, ECB & BoC monetary policy meetings, Aus CPI, Prelim PMIs Oct
Recap from last week
Fed speeches last week acknowledged that US economic activity had picked up through Q3 – including spending and payrolls growth. Recent inflation prints remain on a downward trend, but were “less encouraging”. Moderating wage growth was a stronger theme from the speeches, with wage growth “moving closer to levels that would be consistent with 2% inflation”. However, the central question was whether economic growth would moderate from here given the recent “significant tightening of financial conditions” resulting from higher long-term bond yields. The FOMC stance is unlikely to change from “proceeding carefully” with policy rates staying on hold. Speeches by Fed Chair Powell and Governor Waller suggested that there may be a higher bar for another rate hike, but that another hike was not off the table. More specifically, if growth stays strong AND, even if CPI just stabilizes here, then that could form the basis for more tightening by the FOMC.
In line with recent stronger economic data, US retail sales increased by more than expected while the prior month was revised higher. This lifted the trend of nominal and real retail sales growth through Q3 compared to Q2. US housing data was more downbeat than in recent months, amid rising mortgage rates. New mortgage applications in the prior week fell by -6.9%. New residential construction data recorded a fall in new permits in Sep (across all regions), while housing starts increased modestly compared to the sharper fall in Aug. Existing home sales in Sep fell to a new pandemic-era low of 3.96m units (SAAR-basis). Home builder sentiment in Oct continued to weaken with the headline index falling 9% to 40 – still above the pandemic low of 30. Industrial output growth was stronger than expected in Sep (although Aug was revised lower) and manufacturing output growth improved across both durable and non-durable goods industries.
Outlook for the week ahead
There will be several areas of focus this week. The first will be on US inflation and economic growth to further round out the view of the ‘totality of the data’ leading up to the FOMC meeting next week.
US PCE inflation for Sep is expected to ease slightly to +3.4% (from +3.5% in Aug). Core inflation is expected to slow to +3.7% in Sep (from +3.9% in Aug), with the monthly pace rising slightly to +0.3%. Core PCE at +3.7% would be in line with the current FOMC median projection for the year-end result. The prelim University of Michigan consumer sentiment survey for Oct noted some upward movement in one-year and five-year inflation expectations. The final survey result for Oct this week will show whether the change in inflation expectations has been revised.
The first look at US GDP growth for Q3 may be more important than usual given how much focus has been placed on the ‘resilient’ economic conditions. GDP in Q3 is expected to accelerate to +4.1% (SAAR) from +2.1% in Q2.
There will be several Fed speeches this week – unusual in the week before an FOMC meeting. All speeches are noted as ‘opening remarks’ in the Federal Reserve Calendar. Remarks have been scheduled for Fed Chair Powell, Governor Waller, and Fed Vice Chair for Supervision Barr.
This is the first of several weeks of central bank meetings. This week, the ECB and BoC will meet and both are expected to keep policy rates on hold.
The Aus Q3 CPI will be released. The RBA minutes and speeches over the last two weeks suggest that the Q3 CPI report could be important for the next RBA meeting (7 Nov). Aus headline CPI is expected to slow over the year to +5.3% from 6% in Q2 while the quarterly growth is expected to increase to +1.1% from +0.8% in Q2. Trimmed mean inflation is expected to stay elevated at +1.1% over the quarter and to slow to +5% over the year (from +5.9% in Q2). Over the last week, there was a modest lift in market expectations for another hike by the RBA. However, the Sep labor market survey was lacklustre – possibly confirming the RBA view that the labor market has ‘turned a corner’. The RBA Governor Michele Bullock and Assistant Governor Kent will appear before the Aus Senate Economics Committee after the CPI report, providing some opportunity to signal any potential change in policy outlook if appropriate.
Finally, the global flash PMIs for key G4 economies for Oct will be released this week. This will provide the first view of growth momentum across manufacturing and services leading into Q4.
Geopolitical risk and uncertainty remain elevated this week.
The US House of Representatives is yet to appoint a new speaker. The process of nominating a new speaker will continue this week.
This week, the US Treasury will auction and settle approx. $454bn in ST Bills raising approx. $40bn in new money. The US Treasury will also auction approx. $167bn in 2-Year, 5-Year, 7-Year, and 2-Year FRNs – which will settle on 31 Oct.
QT this week: Approx $10.5bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $1.6bn 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
by Mofar2016 | Oct 23, 2023
Last week, equities reversed sharply lower from resistance as geopolitical risks escalated. This is an important juncture for global risk markets. If equities push to new cycle lows, the corrective decline will be invalidated and bears likely take control from a big picture perspective with a bearish change in trend. Gold and Silver continued to […]
by Kim | Oct 16, 2023
Key events this week – US Fed Chair Powell speech, US retail sales, CPI reports; UK, Canada, NZ, Japan, and the Euro Area
Recap from last week
US annual headline CPI inflation came in only slightly higher than expected at +3.7% while core inflation was in line with expectations at +4.1%. Annual rates of inflation continue to slow. The FOMC view of inflation trends also looks at core goods, core services, and core services ex-shelter to provide a guide on the path of underlying inflation. In Sep, core goods prices continued to fall (led by used car prices correcting after the pandemic shock) and core services price growth also slowed, though remained high at +5.7%. However, it appears that services and core inflation measures remain sticky, even excluding the large impact from shelter prices, as the 6mth and 3mth annualized inflation rates (across a range of measures) increased again in Sep. While the increase isn’t high by recent standards, the change in trend is worth noting. Also, the latest University of Michigan survey of consumer sentiment for Oct (prelim) noted an increase in the year-ahead inflation expectations to +3.8%, still well above the pre-pandemic range. Long-run inflation expectations also edged back up to +3% while staying within the elevated +2.9%-+3.1% range of the last two years.
The FOMC minutes and speeches throughout the week signaled that the path of rates is likely to stay on hold. Fed speeches noted that recent increases in long yields were doing the work for the FOMC in tightening conditions. Several speeches made this point. The FOMC minutes stated that policymakers expect that the cumulative tightening to date will begin to weigh on future economic activity, hiring, and inflation and that the Fed remains in a position to ‘proceed carefully’. The minutes suggest a higher bar might exist for a further rate increase. It was noted that communications may now need to shift from ‘how high’ to raise the policy rate to ‘how long to hold the policy rate at restrictive levels’.
Outlook for the week ahead
The totality of US data so far in Q3 continues to revolve around the theme of ‘recent stronger than expected activity’. So far, the Atlanta Fed GDPNowcast for Q3 growth is running at +5.1% (and importantly, will be updated this week), payroll growth has improved compared to Q2 (with the help of revisions), and underlying inflation pressure remains persistent.
This week, US data will provide a wide-ranging update across consumption, housing, and industrial output for the final month of the quarter. There will also be a notable number of Fed speeches again this week – as this will be the final week before the blackout week (next week) ahead of the FOMC meeting on 31 Oct – 1 Nov. Fed speeches this week will include Fed Chair Powell on Thursday, speaking on the Economic Outlook.
US retail sales growth is expected to slow to +0.3% in Sep from +0.6% in Aug.
US housing data is expected to begin to show an impact from the recent further rise in mortgage rates. New home builder sentiment is expected to stay at a low level. Existing home sales are expected to fall to 3.89m (SAAR) in Sep – this would be a new low for this pandemic cycle. Building permits are expected to slow to 1.45m (SAAR) in Sep (from 1.54m in Aug). New housing starts are also expected to stay somewhat lower than in recent months at 1.38m (SAAR) in Sep (versus 1.28m in Aug).
US Industrial output for Sep is expected to increase by +0.1% in Sep, from +0.4% in Aug. The first regional manufacturing surveys for Oct will be released and recent weaker manufacturing conditions are expected to continue to stabilize.
Other important data out this week includes global CPI reports for Sep; NZ headline inflation is expected to slow to +5.9%, Canada headline inflation is expected to stay unchanged at +4%, UK headline inflation is expected to slow to +6.5%, Euro area inflation is expected to slow to +4.3%, and Japanese CPI ex fresh food inflation is expected to slow to +2.7% over the year.
Aus data will also feature this week with the latest RBA minutes, a speech by new RBA Governor Bullock, and the Sep labor market survey. Aus net employment growth is expected to slow to +21k while the unemployment rate is expected to stay at a low 3.7%.
Geopolitical risk and uncertainty remain elevated this week.
The US House of Representatives is expected to vote on a new speaker on Tuesday.
This week, the US Treasury will auction and settle approx. $555bn in ST Bills, Notes, and Bonds raising approx. $101bn in new money. The US Treasury will also auction approx. $35bn in 5-Year TIPs and 20-Year Bonds – which will settle at the end of the month.
QT this week: Approx $10.9bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $15.6bn 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
