Key events this week – US CPI, PPI, & retail sales, Aus labour market survey
Recap from last week
Among the larger economies, central bank guidance continues to shift from an outright tightening bias to maintaining current interest rates. Recent guidance from the FOMC, the BoE, and the ECB suggests that policy rates have likely peaked but may need to stay at current restrictive levels to continue to bring inflation back to target.
The RBA and the BoC have not fully ruled out the need for further rate hikes as policy rates stay on hold. Last week, the RBA kept rates unchanged while guidance maintained the optionality for a further increase in rates, depending on the evolution of data. Disinflation in Aus has not yet progressed as fast, and measures of domestic-led inflation remain elevated. The RBA also cited a highly uncertain outlook and a priority to return inflation to target among its reasons to keep policy rates unchanged. The updated forecast assumptions in the latest SoMP were based on a cash rate of 3.9% in H2 2024. The BoJ remains the outlier as it considers dismantling YCC and negative rates.
In Jan, the FOMC was more explicit in its guidance that the bias for the next move may be a cut in rates – but that cuts may take longer to materialize. Speeches by Fed officials last week continued to affirm there is no rush to cut rates. Fed Chair Powell made it clear in the recent press conference Q&A that the FOMC no longer expects weaker growth or rising unemployment to see further progress on inflation. However, having confidence that inflation is moving sustainably to 2% means seeing more than six months of good data. Not better data – just more good data;
“The question really is, that six months of good inflation data, is it sending us a true signal that we are, in fact, on a path, a sustainable path down to 2 percent inflation? That’s the question. And the answer will come from some more data that’s also good data. It’s not that the six-month data isn’t low enough. It is. It’s a question of, can we take that with confidence that we’re moving sustainably down to 2%?” US Fed Chair Powell, Press Conference Q&A, 31 Jan 2024
US Fed Governor Waller’s speech in Jan indicated that one hurdle on the path of ‘good inflation data’ was the update to US CPI seasonal adjustment factors released last week and whether it affected the trend of disinflation during 2023. Importantly, there was no notable revision to the path of disinflation over the last year, and this implies no change in policy guidance.
Data flow was minimal last week. US activity reflected in various industry PMIs remained positive and suggested that growth ticked higher at a moderate pace in Jan. The US S&P manufacturing PMI lifted back above the neutral 50 level in Jan while the expansion in services activity continued to accelerate at a moderate pace. The latest US Fed senior loan officer opinion survey for Q4 suggests that lending standards were tightened in Q4, but that a “lower net share of banks reported tightening standards compared to Q3”.
The Global S&P PMIs suggested that economic activity increased in Jan as growth in orders and output increased to a ‘seven-month high’. Global services activity increased at the fastest pace in six months while manufacturing activity also shifted back into expansion led by output growth in consumer goods. Pockets of weak manufacturing conditions remain in the Euro Area (Germany and France).
Outlook for the week ahead
After stronger US payroll data for Jan, the focus shifts to US inflation, consumption, housing, and industrial data to round out the view of US economic activity at the start of 2024. The Atlanta Fed GDPNowcast for Q1 is still based on limited data and currently sits at an elevated +3.4%. The next update will be this week on 15 Feb.
US CPI for Jan is expected to be another ‘good’ inflation report for the FOMC. Headline CPI is expected to ease to +2.9% over the year in Jan (from +3.4% in Dec) and increase by +0.2% over the month in Jan (unchanged from +0.2% in Dec). Core CPI is expected to stay elevated at +3.8% over the year in Jan (down only slightly from +3.9% in Dec) and stay at +0.3% over the month in Jan (unchanged from +0.3% in Dec).
The US PPI for Jan will also be released this week; the headline PPI is expected to ease to +0.7% over the year in Jan (from +1% in Dec). Core PPI is expected to ease to +1.6% over the year in Jan (from +1.8% in Dec).
US retail sales growth is expected to stall in Jan at -0.1% after the much stronger than expected growth in Dec of +0.6%. The prelim reading from the University of Michigan consumer sentiment survey for Feb is expected to show a continued improvement in consumer sentiment as inflation eases.
The first view of US regional manufacturing surveys for Feb will be released and are expected to show a small improvement in activity compared to Jan. US industrial production in Jan is expected to increase by +0.3%, up from +0.1% in Dec.
US housing data for Jan is expected to be little changed as mortgage rates stabilize. New housing permits are expected to increase to 1.515m (SAAR) in Jan while housing starts are expected to increase slightly to 1.47m (from 1.46m in Dec).
There will be several Fed speeches this week, including Governor Waller (“The Dollar’s International Role”).
Aus labour market data for Jan will be released this week. The latest RBA decision noted that conditions continue to ease, but “remain tighter than is consistent with sustained full employment and inflation at target”. Net employment growth is expected to rebound to +20k in Jan (from -65k in Dec) as participation is expected to increase to 66.9% and the unemployment rate edge up slightly to 4% (from 3.9% in Dec).
UK data will be in focus this week including the latest Q4 GDP, labour market for Dec, and retail sales and CPI for Jan.
This week, the US Treasury will auction and settle approx. $595bn in ST Bills, Notes, and Bonds raising approx. $67bn in new money.
US QT this week: Approx $23.7bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $31bn in Notes and Bonds will be redeemed.
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
