by Kim | Dec 18, 2023
Key events this week – US PCE inflation, CPI reports for the UK, Canada, Japan, and the Euro Area (final), BoJ meeting, RBA minutes
Recap from last week
Communication and signaling from the FOMC diverged from other central banks last week. The FOMC kept policy settings unchanged but altered its forward guidance providing the clearest signal yet that it is shifting (or intends to shift) its policy bias. The current market pricing of rate cuts for 2024 was addressed by the Summary of Economic Projections (SEP) which shows a median of three (3) cuts to the FFR next year. US PCE inflation has eased more than expected through the latter part of 2023 and the projected final inflation rate over the year was revised much lower to +2.8%, from +3.3% expected only back in Sept. While US growth has been robust and unemployment has stayed low, both are expected to weaken in 2024. The SEP is saying that if inflation continues to ease, growth slows, and unemployment rises in line with expectations, then rates will need to be calibrated to the slower growth/lower inflation environment. The press conference statement maintained a general theme that the inflation fight was not yet done, but Chair Powell tempered this sentiment noting that ‘our policy rate is likely at or near its peak for this tightening cycle’.
US data last week suggested that aggregate demand likely improved in Nov and Dec. The latest update to the Atlanta Fed GDPNowcast upgraded the pace of US growth so far in Q4 from +1.2% to +2.6%. Retail sales growth was higher than expected at +0.3% (which included a large drag on nominal sales from falling gasoline prices), mortgage applications continued to rebound (mostly, but not all due to refi activity), and initial jobless claims (SA) eased back to +202k. US CPI continued to ease but at a slower pace than in Oct, as energy prices fell. Core CPI inflation remained unchanged at +4% in Nov.
The ECB kept policy settings and guidance unchanged and ECB President Lagarde pushed back on market expectations of rate cuts;
“We did not discuss rate cuts at all. No discussion, no debate on this issue.” ECB President Lagarde
Euro area growth concerns were more muted than in the last meeting despite the negative GDP print in Q3 (explained by a drag from inventories). The ECB remained concerned about domestic sources of inflation, noting that important wage data would not be available until Q1 2024. However, ECB President Lagarde outlined a more favorable view on the progress of disinflation, emphasizing new projections that see inflation at +2.1% in 2025, not 2026.
The BoE kept policy and guidance unchanged. The decision remained at 6-3, with three members preferring to raise the bank rate by 25bps.
The prelim PMIs among the G4 (plus Aus) for Dec were mixed – but the prelim data is earlier than usual so could see some revisions. There was a lift in services growth momentum in the US, Japan, and the UK, but services activity continued to contract in the Eurozone, especially in France. The generally stronger services growth helped to offset persistent weakness in manufacturing. Both the headline manufacturing PMI and the manufacturing output indexes fell into contraction across all countries in the prelim Dec release.
Outlook for the week ahead
Inflation data is a key focus this week. The US PCE inflation data for Nov will help to determine whether the pace of disinflation continued to outperform FOMC forecasts. Annual headline PCE inflation is expected to slow to +2.8% in Nov from +3% in Oct and slow to 0% over the month. Some forecasts are expecting the headline PCE inflation rate to decline over the month. Core PCE inflation is expected to slow to +3.4% in Nov and stay around +0.2% over the month.
There will be a broad range of US data which will provide a view on the pace of aggregate demand in Q4 and whether momentum is continuing to improve from the slow start to the quarter. This includes personal consumption expenditures (expected to increase by +0.3% in Nov, up from +0.2% in Oct) and personal income (expected to increase by +0.4% in Nov, up from +0.2% in Oct). The final University of Michigan consumer sentiment for Dec will be released and is expected to show that the strong rebound in sentiment from the prelim release was sustained through the month. US housing data for Nov will be released this week – permits, starts, existing home sales and new home sales are all expected to moderate further. Further regional manufacturing survey data and durable goods orders for Nov are also out this week. Finally, the third version of US GDP for Q3 is expected to confirm growth of +5.2%.
Global inflation data is broadly expected to show continued progress on disinflation. CPI data for the Euro area is expected to confirm that headline inflation slowed to +2.4% in Nov and fell by 0.5% over the month. Canada’s CPI rate is expected to slow to +2.9% over the year in Nov and by -0.2% over the month. UK inflation is expected to slow to +4.4% over the year, and by +0.2% over the month in Nov. Finally, Japanese National CPI is expected to slow, with the main BoJ measure of core CPI ex fresh food expected to slow to +2.5% over the year.
The BoJ will meet this week on policy. Policy settings are expected to be unchanged at this meeting. Updates to forecasts are not due until the next meeting.
Finally, the RBA minutes will be released. The Board kept the cash rate on hold in Dec for two main reasons; not much news during the inter-meeting period (the monthly inflation series doesn’t provide enough insight into services inflation) and holding the cash rate would allow some time for the latest rate hike to take effect. The minutes should provide some detail about the case to hold rates steady. The Aus labor market report for Nov showed that the economy is still generating strong job growth. However, the unemployment rate ticked higher to 3.9% from 3.8% due to even stronger growth in the size of the labor market – from the latest increase to another new series high in the participation rate.
This week, the US Treasury will auction and settle approx. $429bn in ST Bills, with a net paydown of -$3bn.
The US Treasury will also auction the 20-Year Bond and 2-Year FRN this week – to settle over the next two weeks.
QT this week: Approx $2.1bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $1.7bn in ST Bills will mature and roll off (redeemed) the Fed 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
Happy holidays to all!
by Mofar2016 | Dec 18, 2023
NB:- This will be the last update for 2023. Wishing everyone a safe and happy holidays and a very prosperous new year. We will be taking some time off to refresh over the holidays and prepare for the new year. Thank you to all for your support as we look forward to the year ahead […]
by Kim | Dec 11, 2023
Key events this week – Central bank meetings; FOMC, BoE, ECB, and SNB, US CPI & retail sales, Aus labour market survey, S&P prelim PMIs Dec
Recap from last week
Robust US labor market conditions amid easing inflation are continuing to support households while the FOMC is expected to maintain restrictive policy settings.
US non-farm payrolls rebounded by more than expected in Nov and this was broadly a good jobs report. Nonfarm payrolls increased by +199k (expecting +180k) versus +150k in Oct (unrevised). From the household survey; the notably stronger increase in employed persons over the month more than offset the increase in labor supply from higher participation and population growth – and the unemployment rate fell back to 3.7%. Average hourly earnings rebounded to +0.35% over the month and stayed little changed around +4% over the year. The average workweek also increased slightly to 34.4 hours.
Despite the good result for the month, growth has slowed from the pandemic highs across payrolls, employment, job openings, and average hourly earnings. The fall in job openings was more pronounced in Oct (lagging data) – with the job opening rate falling to 5.3 (from 5.6 in Sep). The fact that the rate of job openings continues to fall while the layoff and discharge rate remains at a series low of 1.0 will likely be a positive sign for the FOMC.
The prelim University of Michigan consumer survey for Dec showed a notable rebound in consumer sentiment amid falling inflation expectations and emerging hopes that US elections next year will be favorable for the economy;
Consumer sentiment soared 13% in December, erasing all declines from the previous four months, primarily on the basis of improvements in the expected trajectory of inflation. Source: University of Michigan Consumer Sentiment Prelim, Dec 2023
Recent lower US inflation prints have also supported a near-term lift in real personal disposable income growth – which, together with solid labor market conditions, is also likely to be supportive of improving consumer sentiment.
Global growth was slower in Q3. Euro Area Q3 GDP growth was revised lower to -0.1%. However, this was the result of a negative contribution from the change in inventories which offset an improvement in household spending growth. Japanese Q3 GDP growth was revised lower to -0.7% based on a larger drag from the change in inventories, but household spending and the net export contribution remained weak. Aus Q3 GDP growth was slower than expected at +0.2% and household consumption growth stalled. The BoC policy meeting also noted that the slowdown in the Canadian economy was reducing inflationary pressures, as growth stalled over the middle quarters of the year.
Looking forward into Q4, the Global PMIs for Nov indicated that the manufacturing downturn continued to ease. There was a lift in momentum at the composite PMI level in Nov – led by an improvement in manufacturing conditions (though still in slight contraction) and a continued modest expansion in services.
Outlook for the week ahead
This will be a big week of central bank meetings and data in the lead-up to the end of the year.
Across many developed market economies, inflation is coming down, and growth is slowing. Markets have begun pricing in more and earlier rate cuts for 2024. Central bank meetings this week should provide some insight into the expected path of policy rates over the next year – the outlook is likely to remain cautious and uncertain, reinforcing that it is too early to call the fight on inflation done.
The FOMC is expected to keep policy settings unchanged. The focus of the meeting will be Fed Chair Powell’s press conference and the latest Summary of Economic Projections (SEP). The SEP is expected to provide important signaling on the change in the path of policy rates amid slowing inflation and low unemployment conditions. The FOMC is still likely to reinforce the position that it is not yet done on the inflation fight and Chair Powell has recently cautioned that it would be “premature” to “speculate on when policy might ease”.
During the two-day FOMC meeting, the US CPI for Nov will be released. Headline CPI is expected to be flat over the month and slow to +3.1% over the year as energy prices continue to fall. Core inflation is expected to increase by +0.3% over the month and stay unchanged at +4% over the year. US retail sales for Nov will be released after the meeting and are expected to fall slightly by -0.1% over the month.
The ECB is expected to keep policy settings unchanged. Recent speeches have suggested that the more notable easing in inflation over the last few months could make further policy tightening unlikely.
The BoE and SNB are expected to keep policy settings unchanged.
The Aus labour market survey for Nov is expected to show net employment growth slow to +1k over the month and the unemployment rate to lift to 3.8% (from 3.7% in Oct). The RBA kept policy rates on hold last week after increasing the cash rate at the Nov meeting due to concerns over persistent domestic inflation.
The final round of PMIs for the year will be released this week. The prelim G4 (plus Aus) prelim PMIs for Dec will provide some insight into the pace of growth in manufacturing and services in Q4.
This week, the US Treasury will auction and settle approx. $537bn in ST Bills, Notes, and Bonds raising approx. $63bn in new money.
QT this week: Approx $3.9bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $17.5bn in ST Bills, Notes, and Bonds will mature and roll off (redeemed) the Fed 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 | Dec 11, 2023
Last week, equity markets continued to consolidate below resistance while threatening to extend higher towards 5th wave targets. The troops are now following the generals for a hard test of ATH's. This week holds significant market risks as equities attempt to press higher in the face of key Inflation and Retail Sales data along with […]
by Kim | Dec 4, 2023
Key events this week – US non-farm payrolls, RBA & BoC meetings, GDP Q3; Aus, Japan and the Euro Area
Recap from last week
Progress on slowing US and Euro Area inflation has reignited optimism for a policy shift with markets pricing a larger number of rate cuts in 2024.
In the US, better-than-expected progress on PCE inflation, amid signs of easing growth momentum and some dovish central bank signaling, saw up to five rate cuts priced for 2024 and commencing as early as Q1. US PCE headline inflation eased more than expected to +3% over the year in Oct – which is now below the lower end of the current FOMC projections for the year (PCE inflation projection range is +3.1% to +3.8%). Core PCE inflation slowed as expected to +3.5% in Oct, with the monthly pace slowing to +0.2%. Measures of underlying inflation, such as core services ex shelter slowed more notably in Oct to +3.2% from +3.5% in Sept.
The speech from Fed Governor Waller garnered the most attention before the PCE inflation report. He was ‘increasingly confident’ that policy was tight enough (signaling not likely to see another hike). While “monetary policy has to work now to get inflation back to 2%”, he did outline a potential path for a Fed policy shift, as a means to align rates with slower inflation;
If the decline in inflation continues “for several more months … three months, four months, five months … we could start lowering the policy rate just because inflation is lower,” he said. “It has nothing to do with trying to save the economy. It is consistent with every policy rule. There is no reason to say we will keep it really high.” (Source: Reuters, 29 Nov 2023)
The FOMC will need to manage the risk that easing policy could slow the progress of bringing down inflation. For now, core inflation remains well above the 2% target and unemployment remains historically low. There are signs that growth is slowing from the robust pace of +4.9% in Q3 and the Atlanta Fed GDP Nowcast for Q4 did take a step down to 1.2% last week on slower personal spending growth, but it’s too early to call. Fed Chair Powell sought to address the enthusiasm for slowing inflation leading to a policy pivot;
“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.” US Fed Chair Powell, Opening Remarks, 1 Dec 2023
The prelim Euro Area CPI for Nov also slowed more than expected. Headline CPI slowed to +2.4% in Oct with the monthly pace falling by -0.5% led by falls in energy and services prices. Core CPI also slowed by more than expected to +3.6% (from +4.2% in Oct). The slowing inflation seems to be more consistent with stalling growth in the Euro Area.
The monthly Aus inflation indicator eased by more than expected with headline inflation slowing to +4.9%. The core trimmed mean measure slowed slightly to +5.3% suggesting that inflationary pressures in the center of the distribution remain broad. The tradable versus non-tradable view of inflation will likely reinforce the RBA governor’s view that inflation has become more domestically focused. Non-tradable inflation has eased from a peak of +7.7% in Jan 2023 to +6% in Oct.
Outlook for the week ahead
US labor market data will be the key focus this week. It will be an important and timely data release to help round out the view of the US economy as we look for signs of moderating demand and further easing of wage growth ahead of next week’s CPI for Nov and the FOMC meeting on 12-13 Dec.
US non-farm payrolls are expected to rebound to +180k in Nov after weaker growth in Oct of +150k (impacted by labor disputes). The unemployment rate is expected to stay unchanged at 3.9%. Average weekly earnings growth is expected to pick up slightly to +0.3% over the month but stay around 4% over the year. The Oct (lagging) JOLTS data is expected to show a continued slowing in labor demand with job openings easing to 9.4m.
The RBA will meet this week and is expected to keep policy rates unchanged at 4.35% after hiking by 25bps at the previous meeting. Since the last meeting, RBA Governor Bullock has noted that the nature of inflation in Aus has become “increasingly homegrown and demand-driven”, highlighting the role of monetary policy in addressing inflation. Later in the week, Aus Q3 GDP is expected to show that growth slowed to +0.3% over the quarter (from +0.4% in Q2) and slowed to +1.7% over the year.
The BoC will meet this week and is expected to keep policy rates unchanged at 5%. At the last meeting, the Governing Council noted concerns over persistent underlying inflation (with a special note on the war in Israel and Gaza as a new source of geopolitical uncertainty) – but since then headline and core measures of inflation have continued to ease. Last week, Q3 GDP declined by -0.3% (expecting growth to be flat) as exports declined and household consumption growth stalled.
The second release of Japanese Q3 GDP is expected to confirm the -0.5% contraction (from +1.2% in Q2). The fall in GDP was led by the change in inventories which offset a muted contribution from household consumption, private investment, and net export growth.
The second release of the Euro Area Q3 GDP is also expected to confirm growth stalling at -0.1% in Q3.
The remainder of the S&P Global Services PMI’s for Nov will be released this week.
The US Treasury will auction and settle approx. $429bn in ST Bills raising approx. $6bn in new money.
QT this week: Approx $3.7bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $3.1bn in ST Bills will mature and roll off (redeemed) the Fed 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
