The Macro Outlook for w/c 9 October 2023

by Kim | Oct 9, 2023

Key events this week – US CPI, FOMC Minutes, Fed Speak

Recap from last week

For the moment, robust US labor market conditions continue to support growth resilience. Through the tightening cycle so far, indicators of heightened labor demand across non-farm payrolls, employment, job openings, and wage growth have been slowing from historically elevated levels.  However, as the stimulus-fuelled growth of the pandemic-era reverses, there has not yet been a material deterioration in labor market conditions. The unemployment rate has stayed low so far in this tightening cycle, initial and continuing claims are low, and layoffs, discharges, and quits are almost back in line with pre-pandemic averages.

The FOMC is likely to view the Sep payrolls as in line with “recent stronger than expected activity” as the process of rebalancing continues. Non-farm payroll growth was stronger than expected in Sep at +336k (expecting +163k), while growth in the two prior months was revised higher by +119k. Growth in average hourly earnings stayed low at +0.2% over the month while annual growth slowed to +4.1%. Contributing to slower average hourly wage growth could be the change in the mix of employment growth. Over the last few months, the household survey has shown that employment growth has been driven by higher part-time employment while full-time employment growth has slowed but has stayed elevated. The average work week and participation rate were unchanged, and the unemployment rate stayed low at 3.8%. The JOLTS data for Aug showed a surprise increase in the job openings rate, back up to 5.8. The number of job openings has been falling through this tightening cycle, but is still above the pre-pandemic average of 4.2, reflecting some ongoing tightness in the labor market.

The global S&P PMI’s showed stalling manufacturing activity persisted through to the end of Q3. Eurozone manufacturing remained in firm contraction, with conditions deteriorating in Japan, the UK, Aus, Canada, and the ASEAN group at the end of Q3. US manufacturing conditions have stayed little changed. Stronger global services growth had been helping to offset weaker manufacturing conditions. However, the services expansion has slowed throughout Q3 to a more modest pace of growth. Services growth has slowed to a stalled pace in the US, the UK, China, and the Eurozone.

The RBA and RBNZ both kept policy settings unchanged in Oct.

Outlook for the week ahead

There are several important events this week. We are now in the lead-up to the next FOMC meeting on 1 Nov and the CPI report for Sep will be an important input. The FOMC is looking for continued progress on slowing inflation and while inflation is still too high, recent reports have been going in the right direction. Headline CPI growth is expected to slow to +3.6% in Sep from +3.7% in Aug and the monthly rate is also expected to ease to +0.3% in Sep from +0.6% in Aug. Core CPI is also expected to ease to +4.1% in Sep from +4.3% in Aug while the monthly core rate is expected to stay unchanged at +0.3%.

The US PPI data for Sep will come out before the CPI report this month. Headline PPI growth is expected to slow to +0.4% over the month, from +0.7% in Aug. Annual growth in the PPI is expected to be little changed around +1.6%.

The latest minutes of the FOMC meeting will be released this week. Of interest will likely be discussions around the timing of (or need for) further rate hikes, as outlined in the Summary of Economic Projections. The market-based probability of another hike in 2023 has come down in recent weeks while long-end yields have been rising.

We will continue to watch initial claims (expected +210k) and the weekly mortgage application data. Mortgage applications continued to deteriorate, falling by 6% last week as mortgage rates increased to the highest level since 2000.

There will be a large number of Fed speakers this week, including Governor Jefferson (The Economic Outlook and Monetary Policy Transmission), Governor Waller (The Evolution of Monetary Policy), and Governor Bowman (Financial Stability in Uncertain Times).

There will be several other data releases; European country-level CPI for Sep, Eurozone, and German industrial production for Aug. The first round of Chinese data for Sep will be released this week which will include CPI/PPI and trade data. Chinese export and import data are expected to continue to improve.

Renewed and elevated geopolitical unrest and local US political uncertainty (due to the removal of the US House Speaker last week) may provide further headline risk through the week.

This week, the US Treasury will auction and settle approx. $433bn in ST Bills, raising approx. $24bn in new money. This week, the US Treasury will also auction approx. $101bn in Notes and Bonds – which will settle next week.

QT this week: Approx $10.3bn 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

The Macro Outlook for w/c 2 October 2023

by Kim | Oct 2, 2023

Key events this week – US non-farm payrolls & ISM surveys, RBA & RBNZ monetary policy decisions

Recap from last week

US core PCE inflation continued to ease while spending and growth data reflected mostly resilient economic conditions. The elephant in the room is the recent increase in long rates, the extent to which long rates may stay higher, and the expected impact on global activity.

US PCE inflation for Aug came in as expected at +3.5%, accelerating slightly mostly due to energy prices. Monthly headline inflation was +0.4% in Aug up from +0.2% in Jul. Core PCE inflation eased to +3.9% in Aug and the monthly rate moved lower. The latest FOMC median projection for core PCE growth is +3.7% over 2023. The trimmed mean measure of underlying inflation also slowed to +3.9% over the year as the monthly rate stayed low (but has inched slightly higher over the past two months). Overall, another good report for the FOMC which wants to see continued progress on inflation to be confident inflation is on a sustainable path lower.

US personal consumption expenditure growth for Aug was slightly lower than expected at +0.4%, and +0.1% in real terms. Lower spending on goods was offset by growth in services. The average growth in personal spending through Q3 has so far stayed higher than in Q2. Real personal disposable income has recorded consecutive falls over the last three months.

US regional manufacturing surveys continued to stabilize in Sep. The decline in new orders has become less severe except in the Philadelphia and Kansas regions. While the outlook and sentiment have been negative, the slowdown in employment growth has stabilized. The recent fall in the prices paid and prices received indexes has stabilized, with both indexes rising slightly over the last several months.

US housing activity continues to show signs of a renewed impact from rising mortgage rates. Mortgage applications, pending home sales (Aug), and new home sales (Aug) all fell in the latest round of data.

US Q2 GDP growth was confirmed at +2.1% SAAR. While PCE expenditure was revised lower, this was offset by a larger contribution from private investment spending and net exports. The Atlanta Fed GDP Nowcast for Q3 GDP growth has stayed high at +4.9%.

Inflation in the Euro area (prelim for Sep) came in lower than expected at +4.3% over the year and the monthly rate slowed to +0.3%. Core CPI is also expected to be lower at +4.5%.

Aus CPI for Aug came in as expected with headline CPI rising to +5.2% while the monthly rate increased to +0.6%. The shorter-term 3-month SAAR has shown some acceleration in headline inflation. The trimmed mean measure of underlying inflation stayed elevated at 5.6% in Aug. Pressure from services inflation remains elevated in the domestic economy.

Outlook for the week ahead

The main focus this week will be US non-farm payrolls and labor market indicators. This is a key report for the FOMC which is looking for a continued rebalancing of the labor market.

US non-farm payrolls are expected to increase by +163k in Sep (from +187k in Aug). Participation is expected to be little changed at 62.8%, but the unemployment rate is expected to fall to 3.7%. Average weekly hours are expected to be unchanged at 34.4. Average hourly earnings are expected to increase by +0.3% over the month and by +4.3% over the year. The JOLTS survey for Aug is expected to show little change in the number of job openings at 8.83m.

The Sep ISM surveys for the US are expected to show a slight moderation in services activity while manufacturing continues to contract.

There will be several Fed speakers this week. At this stage, Fed Chair Powell is scheduled to speak on Monday, but this is not listed on the official Federal Reserve calendar.

The RBA will meet on monetary policy this week. This will be the first meeting under the new leadership of Governor Michele Bullock. The cash rate is expected to stay unchanged at 4.1%.

The RBNZ will also meet on monetary policy this week. The official cash rate is also expected to stay unchanged at 5.5%.

The global suite of S&P PMIs will be released this week for Sep, providing a broader view of manufacturing and services growth momentum through Q3.

This week, the US Treasury will auction and settle approx. $244bn in ST Bills, raising approx. $65bn in new money. The US Treasury estimates that it will raise approx. $852bn in new money in Q4. The next quarterly refunding update will be on 30 Oct and 1 Nov.  

QT this week: Approx $15bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $2.4bn 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