Key events this week – FOMC and BoE meetings, US non-farm payrolls, Aus Q4 CPI, Euro Area prelim CPI & GDP Q4
Recap from last week
There was more good news on US growth and inflation last week. US GDP growth came in higher than expected at +3.3% annualized in Q4, beating expectations for a moderation to +2%. GDP growth has not slowed as much as the FOMC expected. At the end of 2023, the median projection for GDP growth over 2023 was upgraded to +2.6% (range between +2.5% and +2.7%) – the actual year-on-year growth rate in the advance Q4 GDP release last week was +3.1%.
Importantly, against this backdrop of more buoyant growth, US PCE inflation continued to ease. Headline PCE inflation stayed at +2.6% over the year with the monthly pace rising to +0.2% as expected. This has again come in below the FOMC median projection for the 2023 inflation rate of +2.8% and is below the lower bound of the projection range (+2.7% to +3.2%). These projections were only updated at the recent Dec FOMC meeting – suggesting that inflation is still easing faster than the FOMC expected. Annual core PCE inflation eased from +3.2% in Nov to +2.9% in Dec. The core PCE inflation rate also came in well below the FOMC median projection of +3.2% over the year ending Dec and well below the lower bound of the projection range (+3.2% to +3.7%).
The BoC and ECB kept policy settings unchanged. BoC deliberations shifted from whether policy is restrictive enough, to how long to maintain the current level of restrictive rates. The ECB noted that restrictive policy settings are helping to push down inflation. While inflation is expected to ease further, it was premature to discuss rate cuts at this meeting. The BoJ also kept policy settings unchanged. However, a more meaningful shift in policy was hinted at during the press conference. The BoJ could have enough information on wage growth by the Apr meeting to decide on a shift away from negative interest rates with the possibility of several interest rate increases to follow.
The Jan prelim PMIs among the G4 suggested an improvement in growth momentum at the start of 2024. Services output growth accelerated while manufacturing PMIs became less negative. The lengthening of lead times was a theme among manufacturing PMI reports in Jan – due to conflicts in the Red Sea. There was a general link between an improvement in headline manufacturing PMIs and a less severe contraction in the manufacturing output index. The US headline manufacturing PMI improved to above 50 in Jan – somewhat at odds with the weaker US regional manufacturing surveys.
Outlook for the week ahead
The FOMC meets this week and is broadly expected to keep policy settings unchanged at this meeting. Signaling on the outlook will be important, especially given better growth and inflation metrics, but we don’t expect to have a clear timing regarding the start of policy calibration. Despite the good inflation report for Dec, Governor Waller previously noted that the annual CPI revisions in the upcoming Jan report will be an important hurdle to confirming the inflation picture ahead of any policy changes. Governor Waller also noted that risks to the employment and inflation mandates have become more balanced – so more focus on labor market metrics could start to feature for the FOMC.
The US Jan labor market reports will be important later this week. While non-farm payrolls were elevated in Dec, the overall picture was mixed as weaker hiring and employment were offset by a fall in participation. Non-farm payrolls are expected to increase by +173k in Jan (+216k in Dec). Revisions to past payroll growth will stay in focus. The unemployment rate is expected to increase slightly to 3.8% (from 3.7%), which suggests either a softening in employment growth or a rebound in participation (or a mix of both). The level of job openings is expected to be little changed at 8.75m in Dec (an approximate vacancy rate of 5.3%). Governor Waller’s recent speech highlighted that a vacancy rate of 4.5% is an important benchmark for the outlook of labor market conditions.
The BoE will meet this week and is expected to keep policy settings unchanged.
Euro Area growth is expected to stay at a stalled pace while inflation continues to ease. Euro Area GDP growth for Q4 is expected to stay slightly negative at -0.1% over the quarter and at 0% over the year. The prelim Euro Area headline inflation rate for Jan is expected to ease to +2.8% (from +2.9% in Dec). Core inflation for the Euro Area is expected to ease to +3.2% (from +3.4% in Dec).
The Aus quarterly CPI for Q4 will be released this week ahead of the RBA meeting next week. Headline inflation is expected to slow to +0.8% over the quarter (from +1.2%) and to +4.3% over the year (from +5.4%).
The full suite of S&P global PMIs for Jan will be released, starting with manufacturing this week.
The US Treasury will provide its latest quarterly refunding announcement for Q1 and Q2 – on 29 and 31 Jan.
This week, the US Treasury will auction and settle approx. $690bn in ST Bills, Notes, Bonds, FRNs, and TIPS raising approx. $96bn in new money.
QT: Approx $16.4bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $27.6bn in ST Bills, Notes, Bonds, and FRNs will mature and roll off 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
