The Macro Outlook for w/c 25 March 2024

by Kim | Mar 25, 2024

Key events this week – US PCE Inflation, US Fed speeches; Powell, Waller, and Cook

Recap from last week

Rate cut expectations firmed across several central banks following meetings and inflation reports last week. The exception is the Bank of Japan.

In the US, the FOMC kept policy settings unchanged as expected. The median of three rate cuts for 2024 was maintained amid solid growth, easing inflation, and still relatively tight labor market conditions. This stance aligns with previous decisions and statements that have indicated a willingness to lower interest rates in response to a lower inflation environment. The FOMC believes that policy settings are restrictive and are placing downward pressure on the economy and activity. Risks were unchanged; cutting too early versus cutting too late. Guidance was little changed, noting that it will be appropriate to start removing policy restraint at some point this year, but not until the FOMC has gained greater confidence that inflation is moving sustainably towards 2%. However, it was noted that an unexpected weakening in the labor market could warrant a policy response. At the same time, stronger growth or labor market data would only likely result in cuts taking longer to materialize (rather than the risk of a rate hike).

US data last week was mostly positive. Home builder sentiment improved, led by a larger rebound in the Midwest. New housing permits and starts were also stronger than expected in Feb, with Jan results revised higher. The latest iteration of the Atlanta Fed GDPNowcast for Q1 growth was revised slightly higher on the new housing starts data for Feb. The prelim S&P PMI for the US indicated that growth likely remained constant through Mar. The rebound in manufacturing output growth was notable, which helped to offset some easing in services output growth. The jump in inflation was notable based on the commentary provided in the report.

The RBA kept rates on hold however there was a shift in guidance away from a more hawkish bias. Guidance changed from “a further increase cannot be ruled out” to “the Board is not ruling anything in or out”. Governor Bullock noted that recent data has demonstrated that the bank is still broadly on the path of disinflation that it thought it was on. While the Board is “not confident enough yet to say that we can rule out further interest rate changes”,  it does think it is on the path to getting inflation back to target in the forecast period.

The BoE kept policy settings unchanged. Voting reflected a vast majority of members preferring to hold, while only one member voted for a cut. At the previous meeting, there were two votes for a hike. There was a slight change to wording; that the “restrictive stance of monetary policy is weighing on activity in the real economy, is leading to a looser labour market and is bearing down on inflationary pressures”. In interviews later, BoE Governor Bailey noted that the UK is “on the way” to win its fight against inflation and that rate-setters will need to “act ahead of time” and need not wait for underlying inflation pressure to fully ease. Data last week showed that UK inflation eased more than expected in Feb with headline slowing to +3.4% in Feb from +4% in Jan. Core inflation also eased by more than expected to +4.5% from +5.1% in Jan. Services inflation eased, but remained elevated at +6.1%.

The BoJ announced its new policy framework, noting that “the policy framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and the negative interest rate policy to date have fulfilled their roles”. The ST rate target was increased to 0% – +0.1% while the LT rate setting/YCC was unchanged with the upper bound reference around +1%. New guidance noted that “given the current outlook for economic activity and prices, the Bank anticipates that accommodative financial conditions will be maintained for the time being”. Japan’s core inflation ex fresh food came in as expected for Feb at +2.8%. Annual inflation increased across headline and core measures due mostly to base effects. The monthly pace of inflation has remained subdued over the last four months between -0.2% and +0.1%.

The SNB announced a 25bps rate cut.

Canadian CPI for Feb added to expectations of easing. Headline inflation eased to +2.8% (expecting +3.4%). However, it was the easing of the BoC preferred measures of core inflation that was most notable in the latest month. All BoC preferred measures of core inflation are now sitting at low 3’s – the lowest rate of underlying inflation of the last six months. This would be a welcome development by the BoC which had previously noted that it was still too early to consider lowering the policy rate.

The Mar prelim PMIs for the G4 indicated that activity continued to trend higher through the final month of Q1. Services activity was broadly above the 50/neutral level and growing at a modest pace except in France and Germany. Manufacturing activity improved to a weaker pace of contraction, especially in the UK and Japan, but remained firmly in contraction in the Eurozone and Aus. The US was a positive outlier, with both manufacturing and services expanding at a moderate pace above the 50-neutral level.

Outlook for the week ahead

It’s a shorter holiday week (Easter). However, the key US PCE inflation data is scheduled for release on the Good Friday holiday. US Fed Chair Powell is also scheduled to speak on Good Friday.

US headline PCE for Feb is expected to be unchanged at +2.4% over the year, while the monthly pace is expected to increase to +0.4% in Feb, up from +0.3% in Jan. Core PCE inflation is expected to be unchanged at +2.8% in Feb while the monthly core reading is expected to be +0.3%, down from +0.4% in Jan.

Other US data this week will provide further input to update the run rate for Q1 GDP growth. US personal spending for Feb is expected to increase by +0.4%, up from +0.2% in Jan. Durable Goods Orders are expected to increase by +1.2% in Feb. New home sales are expected to increase to 0.68m (annualized) in Feb while pending home sales are expected to increase by +1.5%.

There will be several important Fed speeches this week including Fed Chair Powell, Governor Waller, and Governor Cook. Fed Governor Cook will speak on Mon 25 Mar (“The Dual Mandate and the Balance of Risks”). Fed Governor Waller will speak on Wed 27 Mar on the Economic Outlook – this will be an important follow-up to the FOMC meeting last week. Finally, Fed Chair Powell is scheduled to take part in a moderated discussion at the Fed Reserve Bank of San Francisco Macroeconomics and Monetary Policy Conference on Fri 29 Mar (Good Friday).

Aus CPI and retail sales for Feb will be released this week. The Aus monthly CPI series for Feb is expected to show annual inflation edge up to +3.6%, from +3.4% in Jan. Retail sales growth is expected to slow to +0.4% in Feb.

Finally, Tokyo CPI for Mar is expected to show that core CPI ex fresh food eased slightly to +2.4% from +2.5% in Feb. This is considered the leading indicator for Japan’s broader National CPI statistic.

This week, the US Treasury will auction and settle approx. $676bn in ST Bills, Notes, FRNs, TIPs, and Bonds raising approx. $126bn in new money. The Notes and FRN will settle in the following week due to the short holiday week this week.

QT this week: Approx $1.2bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $44.6bn in ST Bills, Notes, and 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

The Macro Outlook for w/c 18 March 2024

by Kim | Mar 18, 2024

Key events this week – Central bank decisions; FOMC, BoJ, RBA, BoE, and SNB, CPI inflation; Japan, UK, Canada, and Euro Area, US housing data, and G4 prelim PMIs for Mar

Recap from last week

The US CPI report indicated that progress on disinflation may have stalled again in Feb. Headline inflation came in higher, as expected, at +3.2% as energy prices increased over the month. The monthly headline inflation rate has increased over the last four months. Core inflation slowed less than expected to +3.8%, as monthly core inflation also continued to trend slightly higher (+0.36% in Feb). The trimmed mean CPI has been a consistent indicator of the underlying trend of inflation. The annual trimmed mean inflation rate slowed to +3.5% in Feb from +3.7% in Jan. However, the monthly pace of trimmed mean inflation has been mostly constant over the last twelve months, but drifting higher over the last few months. This also implies that the underlying trend of disinflation has stalled. The PPI came in higher than expected across both headline and core measures in Feb. Various elements of the PPI feed into the Fed-preferred PCE inflation measure – and hint at expectations for more persistent PCE inflation.

US retail sales and industrial production recorded a rebound in Feb after falls in Jan. However, the rebound in Feb activity did not fully offset the weakness in Jan. US retail sales increased by less than expected in Feb by +0.6% after the Jan decline was revised lower to -1.1%. An increase in auto sales boosted growth this month. Similarly, manufacturing output growth rebounded in Feb but did not fully retrace the Jan falls. Our first view of Mar manufacturing activity – the Empire State Manufacturing survey, showed that, at best, the improvement in Feb activity was maintained into Mar but without higher growth momentum follow through.

Despite the rise in US retail sales, the Atlanta Fed GDP Nowcast for Q1 growth was revised lower to +2.3% (from a +2.5% run rate) on the retail sales and PPI data, reflecting a lower contribution from consumption growth so far in Q1.

Outlook for the week ahead

This is a big week of central bank meetings, inflation data, and important prelim PMIs for Mar data to round out our view of Q1 growth momentum.

There are at least six (6) important central bank meetings this week.

The FOMC is expected to keep policy settings unchanged. At the last meeting, Fed Chair Powell noted that inflation is still too high and ongoing progress on bringing it down is not assured. In the Q&A he specifically noted that the last six months of data had been good, and he was looking for a continuation of that good data. Since then, progress on disinflation seems to have stalled. The pace of growth has eased in Q1 but is still running at an elevated range of between +2-3%. The labor market data provided mixed messages on the strength of payroll growth while the unemployment rate has drifted higher. Fed speeches since the Jan meeting have been successful in pushing out the timing of rate cut expectations to at least Jun with the number of cuts moving down in line with the Jan SEP (a median of three). This week we will find out more about how the FOMC is characterizing the recent trends in inflation, growth, and labor market and how that translates into the latest projections for the policy outlook. The FOMC is also expected to begin talking about ‘balance sheet issues’ and any changes to QT are likely to be covered in the statement and press conference.

US Fed Chair Powell will also give opening remarks at a Fed event on Friday.

The BoJ is meeting this week and is broadly expected to either end its negative interest rate policy settings or signal that such a change is coming shortly. This speculation has been fuelled by the results so far of annual wage negotiations. If policy rates are changed at this meeting, then it will be important to understand what this means for YCC and QE settings. BoJ Governor Ueda has previously noted that even if the negative rates policy is ended, monetary policy settings are likely to remain accommodative. Last week, Japanese Q4 GDP growth was revised upward to +0.1%, due to higher private non-residential investment spending.

Other central bank meetings this week; the RBA, BoE, SNB, and PBoC (prime rate setting) are expected to keep policy settings unchanged. Across these meetings, we’ll be watching for any change in guidance and outlook.

CPI data for Feb will be released for Canada, the UK, Japan, and the Euro Area (final) this week.

Headline inflation in Canada is expected to increase slightly to +3.1% in Feb. Canadian trimmed mean inflation is expected to stay unchanged at +3.4% over the year in Feb.

UK headline inflation is expected to ease to +3.5% in Feb (from +4% in Jan), while core inflation is also expected to slow to +4.6% (from +5% in Jan).

Japanese National CPI is expected to accelerate over the year – given the stronger Tokyo CPI report for Feb. The BoJ preferred measure of core CPI ex fresh food is expected to increase to +2.8% in Feb from +2% in Jan.

The Euro Area CPI for Feb is expected to be confirmed at +2.6% over the year and +0.6% over the month. Core inflation is expected to be confirmed at +3.1% over the year.

US housing data for Feb will be in focus this week. This will feed into the next update of the Atlanta Fed GDP Nowcast for Q1 growth. New housing permits are expected to increase in Feb to an annual rate of +1.5m, up from 1.489m in Jan. New housing starts are also expected to increase to 1.435m (annualized) from +1.331m in Jan. Existing home sales are expected to fall slightly to an annualized rate of 3.95m (from 4m in Jan).

The latest March S&P flash PMIs for the G4 (plus Aus) will be released this week. These will be an important guide for understanding the path of growth momentum through Q1. So far in Q1, services activity has continued to improve, indicating at least moderate growth momentum. Manufacturing activity has stayed little changed with output remaining in contraction, except for the US in Feb.

This week, the US Treasury will auction and settle approx. $512bn in ST Bills raising approx. $25bn in new money. The US Treasury will also auction the 10-year TIPS and 20-year Bond this week.

QT this week: Approx $0.7bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $2.9bn in ST Bills 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

The Macro Outlook for w/c 11 March 2024

by Kim | Mar 11, 2024

Key events this week – US: CPI & PPI, retail sales, and industrial production

Recap from last week

US data last week indicated minimal change in the labor market and growth outlook for the FOMC in two weeks. Although US labor market conditions are gradually easing, they remain mostly positive, while growth remains moderate.

In his testimony last week, US Fed Chair Powell reiterated that the FOMC is in “no rush” to cut rates, and is “waiting to become more confident that inflation is moving sustainably to 2%”, noting that “we’re not far from that”. If the economy evolves as expected, then it will be appropriate to begin to dial back some of the policy restriction “at some point this year”.

One important pillar of the ‘patience on rate cuts’ stance is ‘continued robust jobs growth’. The labor market update for Feb suggests that labor demand continues to ease – but there were mixed messages in the data. Non-farm payroll growth was higher than expected in Feb at +275k, but growth in the prior two months was revised notably lower – especially with the stronger Jan result revised down from +353k to +229k. Even though job growth may not have been as high as previously thought, the pace of growth has remained steady over the last three months. Conversely, the household survey recorded a pronounced rise in the unemployment rate from 3.7% in Jan to 3.9% in Feb. Could this be enough for the FOMC to begin to become more neutral on labor market conditions? The unemployment rate is at the lower end of the range of FOMC projections for 2024. The JOLTS survey for Jan provides a good summary of labor market conditions overall; a continued slowdown in labor demand (as job openings and hires ease further), while layoffs and discharges stay low. The layoff and discharge rate in the JOLTS survey remains at a series low of 1.0. Similarly, initial jobless claims have stayed low so far in this cycle. The anecdotes from the Challenger Job Cut Announcement survey suggest further layoffs may be coming (hiring announcements from this survey also remain relatively low).

Indicators of US economic activity remained positive last week – suggesting continued moderate growth through Q1. Both US services PMI surveys indicated continued modest expansion in Feb. The US Fed Beige Book for the 3 months to the end of Feb noted that activity increased “slightly on balance” since the last update, with only one region noting a slight softening of conditions. The survey noted some softness in retail spending due to heightened price sensitivity. However, retail sales for Feb (out this week) are likely to be bolstered by the rebound in auto sales. The latest Atlanta Fed GDPNowcast showed that US growth inched back up to a pace of +2.6% so far in Q1.

More broadly, the global growth context continued to improve as the Global S&P PMIs for Feb suggested a further improvement in growth momentum across both manufacturing and services activity. Amid the uptick in growth momentum, Chinese trade data came in better than expected with export (and import) growth accelerating more than expected. Chinese CPI also came in hotter than expected, increasing by +1% over the month in Feb and rising by +0.7% over the year in Feb up from -0.8% in Jan.

The Bank of Canada kept rates on hold last week. Guidance was unchanged with the Governing Council noting that higher rates need more time to do their work. Despite some improvement in inflation, the headline rate remains above 3% and underlying inflation pressures are persisting.

The ECB also kept rates on hold last week. While inflation had been easing through the latter half of 2023, the ECB Governing Council is not yet “sufficiently confident” enough that inflation is on the path to 2% to begin easing. ECB President Lagarde hinted at timing milestones though;

“We will know a little more in April, but we will know a lot more in June.”

Outlook for the week ahead

It’s a US data-centric week. The focus shifts to the important US CPI report for Feb out this week. The stronger Jan US CPI result was important, and, together with subsequent speeches, helped to push back the timeline to begin policy normalization. The Feb CPI report will play a crucial role in providing insights into the ongoing progress on disinflation and whether the Jan result was merely a temporary setback or a change in trend.

US headline CPI growth is expected to stay unchanged at +3.1% in Feb, while monthly inflation is expected to increase by +0.4% in Feb, up from +0.3% in Jan. Core inflation is expected to ease to +3.7% in Feb from +3.9% in Jan. The monthly core inflation is also expected to ease to +0.3% in Feb from +0.4% in Jan. As usual, the components contributing to CPI growth will be important – goods versus services, and core services ex-housing.

The US PPI report for Feb will also be released this week – and can provide some insight into possible changes in the Fed’s preferred PCE inflation measure. Headline PPI for Feb is expected to increase by +1.2% over the year in Feb, up from +0.9% in Jan. The monthly PPI is expected to increase by +0.3% in Feb – the same as in Jan. Core PPI is expected to stay unchanged at +2% over the year in Feb, while the monthly core PPI reading is expected to slow to +0.2% in Feb from +0.5% in Jan.

Several other reports will feed into the broader US growth picture. The most important one will be US retail sales. US retail sales are expected to increase by +0.7% in Feb after falling -0.8% in Jan. A rebound in auto sales for Feb suggests some support for retail sales growth. Last week, the US Fed Beige Book for Feb had noted that “consumer spending, especially on retail goods, “inched down in recent weeks”. Reports noted heightened price sensitivity by consumers and households trading down and shifting away from discretionary spending.”

There will be several reports on US manufacturing and output. Industrial production growth in Feb is expected to stay unchanged at 0% after falling by -0.1% in Jan. The US manufacturing output PMI shifted into expansion in Feb. The first regional manufacturing update for Mar will be the NY Empire State manufacturing survey.

We are in the blackout period for Fed speeches ahead of the next FOMC meeting next week on 19-20 Mar.

This week, the US Treasury will auction and settle approx. $591bn in ST Bills, Notes, and Bonds raising approx. $87bn in new money.

QT this week: Approx $1bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $9bn in ST Bills, Notes, and 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