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
