Key events this week; Inflation – US PCE inflation, Euro Area CPI, Japanese CPI, Aus CPI; US & Canada Q4 GDP; RBNZ Rates Decision
Recap from last week
Central bank minutes and speeches were in focus last week. The message theme from the FOMC & ECB minutes and speeches was; patience on rate cuts.
FOMC guidance shifted to rate cuts as the bias for the next move in policy rates. Guidance was changed as the upside inflation risk has diminished and this is likely the peak in policy rates. However, rate cuts may take longer to materialize – the Committee needs greater confidence that inflation is moving sustainably to 2%. The minutes note balancing the risk of cutting too early and stalling progress on inflation, with the risk of maintaining an ‘overly restrictive’ stance for too long. With the broader economy doing well, there is time to be patient. The Jan US CPI & PPI placed a question mark over the progress on disinflation. Since then, some speeches have suggested a need to see broader disinflation among goods and services to be more confident inflation is moving back down. Governor Waller’s speech last week noted that the Jan CPI report likely pushed back the timing of rate cuts to verify whether the Jan result was noise or the start of the new trend. Governor Waller specifically noted that the uptick in inflation was spread more widely among goods and services. He also noted that there was no rush to start to normalize policy rates but still expects to start that process this year.
One thing that is clear is that by many metrics, the U.S. economy is healthy and well positioned to continue growing and adding jobs.
That makes the decision to be patient on beginning to ease policy simpler than it might be. I am going to need to see at least another couple more months of inflation data before I can judge whether January was a speed bump or a pothole. Source: Governor Waller, speech 22 Feb 2024
The other important point from the minutes was that the FOMC will begin discussing ‘balance sheet issues’ at the Mar meeting to ‘guide an eventual decision to slow the pace of run-off’.
The ECB minutes held a similar message; that patience was still needed. Policy rates were kept on hold at the Jan meeting. Even though inflation had eased, progress on disinflation remained fragile, and loosening policy rates too early could undo some of the progress.
The RBA minutes outlined the case to keep rates on hold. Only two policy options were discussed – to hike or to hold. The risk that inflation wouldn’t return to the target range had eased, however, it would still be some time before the Board was sufficiently confident that inflation would return to target in a reasonable timeframe. The costs of inflation not returning to target in a reasonable timeframe were potentially very high; which led the Board to agree that it was appropriate not to rule out a further increase in the cash rate. The latest wage price index for Q4 was slightly higher than expected and real wages came in slightly positive for the first time since early 2021. With the CPI retreating and the WPI staying high after years of slower growth, the RBA will be monitoring how consumer spending will respond and what it means for inflation.
The overall direction of the Feb prelim PMIs for the G4 (plus Aus) was a continued improvement in services growth while manufacturing activity stayed little changed and in contraction. There were several crosscurrents this month. The US was an exception with a notable overall improvement; US manufacturing output expanded at a faster pace and services activity continued to expand at a modest pace. Japanese manufacturing returned to a sharp contraction in Feb. Eurozone services growth returned to expansion while manufacturing activity remained weaker, led by the renewed downturn in German manufacturing.
Outlook for the week ahead
Global inflation and growth data will be in focus this week and both will be important inputs as central banks consider the path of policy rates and the implications for the timing of policy adjustments.
US PCE inflation, the FOMC preferred inflation measure, is expected to increase at a slightly faster monthly rate, given some of the Jan PPI results. Headline PCE inflation is expected to ease to +2.4% over the year, but increase by +0.3% over the month (up from +0.2% in Dec). For comparison, the latest FOMC median headline PCE inflation projection is +2.4% for the end of 2024. Core PCE inflation is expected to ease further to +2.8% from +2.9% in Dec. Monthly core PCE inflation is expected to increase by +0.4% over the month, up from +0.2% in Dec. The FOMC median projection for core PCE for 2024 is also +2.4% – the Jan result would still be above that level.
Growth data for the US includes the second estimate for Q4 GDP which is expected to stay around the +3.3% (annualized) rate for Q4. This would mean that growth over the year in 2023 would be +3.1% – which is above the FOMC median growth projection for 2023 of +2.6%. There will also be a wide range of US income, spending, housing, and industrial activity data for Jan and Feb, including the ISM manufacturing PMI for Feb. These data will feed into a comprehensive update of the Atlanta Fed GDPNowcast for Q1 US growth – which currently sits at +2.9%. The FOMC median projection is for growth to slow by the end of 2024 to +1.4%.
There will be several Fed speeches, including NY Fed President Williams, Governor Waller (responding to a paper titled, “Quantitative Tightening Around the Globe; What Have We Learned?” – which may start to lay the groundwork for changes to QT), and Fed Governor Kugler.
The Aus monthly CPI for Jan is expected to increase to +3.5% (from +3.4% in Dec).
The Euro Area prelim CPI for Feb is expected to continue to moderate. Headline CPI is expected to slow to +2.5% in Feb (from +2.8% in Jan). Core CPI is expected to ease to +2.9% in Feb (from +3.3% in Jan).
Japanese National CPI figures for Jan will be released early this week. Headline inflation is expected to ease to +2.5% in Jan (from +2.6% in Dec). The BoJ preferred measure of CPI ex fresh food is expected to ease to +1.9% in Jan (from +2.3% in Dec). Core CPI (ex-fresh food and energy) is still running at approx. +3.7% but is also expected to ease. This will be an important input for the BoJ as it considers the case for and timing of its potential exit from the negative rates regime.
Canadian Q4 GDP is expected to return to growth of +0.8% annualized (from -1.1% in Q3).
The RBNZ will meet this week and is expected to stay on hold at 5.50%. There has been some speculation that the RBNZ may raise its policy rate further.
The broader global suite of S&P PMIs for Feb will be released towards the end of the week – starting with global manufacturing activity.
This week, the US Treasury will auction and settle approx. $668bn in ST Bills, Notes, Bonds, and TIPS raising approx. $137bn in new money.
QT: Approx $20bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $29bn in Notes & Bonds will mature on the Fed balance sheet and be redeemed/rolled off the 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
