The Macro Outlook for w/c 8 January 2024

by Kim | Jan 8, 2024

Key events this week – US CPI, Aus monthly CPI & retail sales

Recap from last week

Details of the latest FOMC deliberations provided some balanced commentary. The change in guidance to include ‘any additional tightening’ was intended to relay that while the FFR was likely at or near its peak, the door remained open to further tightening if appropriate. Other commentary highlighted the possibility of keeping the “target range at its current value for longer than they currently anticipated”, depending on how the economy continued to evolve. Concerns noted that the easing in financial conditions “beyond what is appropriate” could make it more difficult to reach the inflation goal. Despite the more balanced commentary, the SEP still reflects a consensus around several rate cuts for 2024, amid an “unusually elevated degree of uncertainty”;

In their submitted projections, almost all participants indicated that, reflecting the improvements in their inflation outlooks, their baseline projections implied that a lower target range for the federal funds rate would be appropriate by the end of 2024. Source: FOMC Minutes, 12-13 Dec 2023

The decision to keep rates unchanged in Dec was still deemed the appropriate path; job gains were slowing, growth had slowed from the fast pace of Q3, and generally tighter financial conditions were still expected to weigh on activity, hiring, and inflation. This remains the context going into 2024.

US labor market conditions continued to ease in Dec. The current labor market dynamic is one of resilience though; job growth is easing, but unemployment has stayed low.  In Dec, non-farm payrolls came in stronger than expected at +216k, while the two prior months were revised lower by -71k. Annual growth in payrolls slowed further to 1.75% in Dec, the slowest pace of growth of the last year, and is now just above the 5-year pre-pandemic average. The household survey was less encouraging as employment fell markedly in Dec, reversing the stronger Nov gains. The unemployment rate was unchanged at 3.7% though (below the FOMC median projection of 3.8% for the year-end) due to the accompanying fall in participation. Average weekly hours were little changed. Annual average hourly earnings growth ticked up slightly to +4.1% in Dec but growth has consistently slowed from the +4.8% pace of a year ago.

The US PMI survey data for Dec showed that manufacturing activity remained weaker – this was consistent across both the ISM and S&P surveys. The PMIs provided a mixed view of momentum across services, however, growth remained positive across both surveys. At the end of the week, the Atlanta Fed GDP Nowcast ticked up to +2.5% for Q4 – led by growth in personal consumption expenditures (vehicle sales for Dec).

The prelim Eurozone CPI ticked higher as expected in Dec. Euro area inflation is expected to be +2.9% in Dec, up from +2.4% in Nov. Core CPI is expected to come in slightly lower than expected at +3.4%.

The S&P Global PMIs for Dec were more constructive into year-end. While global manufacturing activity stayed in mild contraction, it was offset by another moderate lift in services growth momentum.

Outlook for the week ahead

Inflation will be the main focus this week with US, Aus, and China CPI reports out this week.  

US CPI for Dec is expected to continue to confirm the disinflation trend established during the latter part of 2023. In the latest FOMC minutes, upside risks to inflation were seen as having “diminished” but it was noted that inflation is still well above the Committee’s longer-run goal. Headline CPI in Dec is expected to be +3.2%, up slightly from +3.1% in Nov. Over the month, CPI is expected to increase by +0.1% in Dec, up from 0% in Nov. Core CPI is expected to ease to +3.8% over the year in Dec from +4% in Nov and is expected to increase by +0.2% over the month, down slightly from +0.3% in Nov.

The Aus monthly CPI series for Nov will be released, ahead of the more comprehensive quarterly CPI update for Q4 due at the end of the month. In Nov, headline CPI is expected to have eased to +4.4% from +4.9% in Oct. The Nov retail sales are expected to increase by +1.2% over the month after falling by -0.2% in Oct.

This week, the US Treasury will auction and settle approx. $429bn in ST Bills, raising approx. $13bn in new money. The US Treasury will also auction the 3-year and 10-year Notes and the 30-year Bond this week – to settle next week.

QT this week: Approx $9bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $1.4bn in ST Bills 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

The Macro Outlook for w/c 1 January 2024

by Kim | Jan 2, 2024

Key events this week – FOMC Minutes, US Non-Farm Payrolls, Euro Area CPI, PMI’s for Dec

Recap from last week

US PCE inflation for Nov continued to ease at a faster-than-expected pace. We recently noted that US inflation has eased more than expected through the latter part of 2023, prompting the FOMC to revise its inflation projections lower at the Dec meeting. In Nov, the headline PCE inflation rate slowed to +2.6% while the core PCE inflation rate slowed to +3.2%. Both of these measures are already at or below the lower full-year FOMC inflation projection submitted in Dec. Importantly, both annual and short-term measures continue to indicate that the path of inflation and underlying inflation remains lower.

Despite the high inflation and rising rate environment of the last several years, US economic growth has been resilient and labor market conditions have stayed remarkably strong. While the growth and unemployment situation is expected to weaken in 2024, FOMC projections reflect a ‘soft landing’ scenario for the US. The FOMC meeting in Dec signaled a potential shift in the rates cycle – to align rates with further expected progress on lower inflation and a slower growth environment in 2024. We’ll find out more details about the FOMC deliberations and signaled policy shift when the Minutes of the Dec FOMC meeting are released this week.

The latest update to the Atlanta Fed GDPNowcast – a running estimate of US GDP growth – showed Q4 growth slowed to +2.3% from +2.7% based on the Nov personal spending and residential investment data. The main contributor was the slower pace of personal spending growth in Nov of +0.2% (expecting +0.3%) while spending growth in Oct was revised lower to +0.1%. US residential investment spending data was mixed – but showed sentiment stabilizing amid falling mortgage rates.

Outlook for the week ahead

We are straight back into important economic data this week with a comprehensive update on the US labor market. The resilience of the US labor market has so far surprised many – and it remains an important element of the current economic resilience.

The US labor market data in Dec is expected to show more of the same – ongoing tight conditions while labor supply and demand conditions come into better balance. In Dec, US non-farm payroll growth is expected to slow to +163k total payrolls (from +199k in Nov). The unemployment rate is expected to edge slightly higher to 3.8% in Dec (from 3.7% in Nov). The FOMC projection for 2024 reflects an expectation that the unemployment rate will end the year at 4.1% (median projection) within a potential range of a 3.9% to 4.5% unemployment rate throughout the year.

US average weekly hours are expected to stay at 34.4 in Dec. Average hourly earnings growth is expected to slow to +0.3% over the month and to +3.9% over the year. The Nov JOLTS survey (lags by one month) is expected to show little change in the level of job openings of around 8.8m.

The US ISM manufacturing and services PMIs for Dec will be released. Stronger services growth momentum is expected to offset continued sluggish manufacturing conditions.

The prelim Euro Area CPI for Dec is expected to rebound slightly. It was noted at the latest ECB meeting, that inflation was “likely to pick up again temporarily in the near term”. Euro Area headline inflation is expected to increase by +3% in Dec, up from +2.4% in Nov. Core CPI is expected to remain little changed at +3.5%.

Finally, the full suite of global S&P PMI’s for Dec will be released providing a broad update on growth momentum through to the end of Q4. The prelim release of G4 PMIs in Dec showed a mixed picture. The prelim data was earlier than usual so could see some revisions in the final release. To recap the prelim Dec results; 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 across all the G4 economies in Dec.

This week, the US Treasury will auction and settle approx. $597bn in ST Bills, Notes, and Bonds, raising approx. $73bn in new money.

QT this week: Approx $10bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $33bn in ST Bills, Notes, Bonds, and FRNs 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