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
