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!
