The Macro Outlook for w/c 8 April 2024

by Kim | Apr 8, 2024

Key events this week – US CPI & PPI, FOMC Minutes, ECB, BoC, & RBNZ meetings

Recap from last week

US economic activity has maintained a robust pace of growth so far in the first quarter, with strong labor market conditions persisting through March. In this context, some Fed speeches have signaled the possibility that, if inflation progress continues to stall here, rate cuts could be pushed further out. At the time of writing, market rate cut expectations had (just) moved out to Jul with only two cuts now priced in for this year.

In his speech last week, Fed Chair Powell reiterated that solid growth and US labor market conditions were providing the Fed with time to ensure that inflation is on a sustainable path to 2% before starting to cut interest rates.

Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy.

On the recent stalling of disinflation progress, Fed Chair Powell reinforced that the job was not yet done and even acknowledged that “it is too soon to say whether the recent readings represent more than just a bump”.

The US labor market report was generally strong for Mar. Non-farm payrolls came in much higher than expected at +303k for Mar (expecting +205k). Revisions were also positive. This is now the fourth month in a row of elevated payroll growth. There were notable increases in construction, private education & health, leisure & hospitality, and government payrolls. The average weekly hours increased back up to 34.4 and average weekly earnings also increased by +0.35% Mar, up from +0.2% in Feb. The unemployment rate was little changed from 3.86% in Feb to 3.83% in Mar as participation and household employment metrics rebounded for the broader 16-year+ age group.

The JOLTs data showed that recently slowing job openings had stabilized at around a rate of 5.3% in Jan & Feb. There was a small uptick in the layoff and discharge rate in Feb to 1.1% – which is still near the series low. The Challenger Job Cut Announcement survey for Mar continued to hint at elevated job cuts to come and continued subdued hiring announcements.

US growth data remained positive last week. The rebound in the US ISM manufacturing survey for Mar helped offset slightly slower, albeit still positive, growth from the ISM services survey and slower growth in vehicle retail sales for Mar. At the end of the week, the latest Atlanta Fed GDPNowcast for Q1 growth lifted to +2.5% (from +2.3% at the start of the week).

The latest global PMI’s for Mar reflected a continued improvement in global activity. Across both manufacturing and services, output growth expanded at the fastest pace since mid-2023, supported by further improvements in new orders and optimism in the business outlook.

Outlook for the week ahead

The US CPI (and PPI) report this week will be important for the US rates outlook. Inflation data for Jan and Feb were characterized as “disappointing” in the context of the good progress made in the second half of 2023. Some Fed speeches have emphasized the need for several more ‘good readings, like the ones in late 2023’ on inflation to have greater confidence that inflation is moving sustainably to 2% before it becomes appropriate to begin lowering policy rates.

Headline US CPI is expected to increase over the year to +3.4% in Mar, up from +3.2% in Feb. The monthly pace of headline inflation is expected to ease to +0.3% in Mar, from +0.4% in Feb. Core CPI is expected to ease slightly to +3.7% in Mar, from +3.8% in Feb. The monthly core CPI is expected to increase by +0.3% in Mar, down from +0.4% in Feb.

Headline US PPI for Mar is expected to increase to +2.3% in Mar, up from +1.6% in Feb. The monthly PPI is expected to ease to +0.3% in Mar, down from +0.6% in Feb. Core PPI is expected to increase by +2.3% over the year in Mar, up slightly from +2% in Feb. Core PPI is expected to increase by +0.2% over the month in Mar, down slightly from +0.3% in Feb.

Central banks will also be in focus this week.

The FOMC Minutes of the Mar meeting will be released this week. This may provide further insight into the latest changes to the Summary of Economic Projections (SEP), particularly changes in the view around the outlook for rates.

The ECB will meet this week. Policy settings are expected to stay unchanged at this meeting. At the last meeting, the Governing Council noted that it was more confident that inflation was coming down, but not yet sufficiently confident given domestic price pressures had been more persistent. ECB President Lagarde noted that wage data were expected to be a key focus through to the Apr-Jun period; “we will know a little more in April, but we will know a lot more in June” to support changes to the policy rate. The prelim CPI for the Euro Area in Mar continued to slow over the year. The core CPI rate also eased to +2.9%, however, the monthly core rate stayed elevated at +1.1% due to higher non-energy industrial goods and services inflation. Services inflation has stayed unchanged at +4% over the year for the last five months, likely remaining a concern for the ECB.

The Bank of Canada will also meet this week. Policy settings are expected to stay unchanged. At the Mar meeting, the Governing Council noted that it was still too early to consider lowering the policy rate given lingering concerns over inflation and especially underlying inflation. Since then, there has been progress on inflation with the Feb CPI coming in lower than expected and the BoC core measures of inflation easing more notably to +3.1% – the lowest rate of the last six months. The Mar labor market data showed conditions easing with net employment declining and the unemployment rate jumping to 6.1%, up from 5.9% in Feb. This may start to weigh on the BoC outlook – with the latest BoC Business Outlook Survey for Q1 noting that “current conditions remain on the weaker side with firms moderating business investment spending plans as fewer firms feel the need to expand amid ‘persistently weak demand’”.

Finally, the RBNZ will also meet this week and is expected to keep policy settings unchanged. At the Feb meeting the RBNZ noted that “risks to the inflation outlook have become more balanced”. However, headline inflation remains above the 1-3% band “limiting the Committee’s ability to tolerate upside inflation surprises”.

This week, the US Treasury will auction and settle approx. $410bn in ST Bills, with a net paydown of -$52bn. The US Treasury will also auction the 3-year and 10-year Notes and 30-year Bond this week – these will settle next week on 15 Apr.

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

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 April 2024

by Kim | Apr 1, 2024

Key events this week – US non-farm payrolls, US Fed Chair Powell speech, ISM & S&P PMIs, ECB & RBA minutes

Recap from last week

US PCE inflation data for Feb was mixed. Headline US PCE inflation was in line with expectations at +2.4% and was unchanged compared to Jan (+2.4%) while core PCE inflation continued to slow to +2.8%. The monthly measures of inflation in Feb did slow from the higher readings in Jan but did not fully retrace the higher Jan results. The 6-month and 3-month annualized rates across a range of measures remain higher than the annual rates – suggesting that recent progress on disinflation may have stalled.

In a Q&A last Friday, US Fed Chair Powell was asked whether the Feb inflation report could be characterized as “more good data”. Chair Powell summed up the report by noting that the Feb inflation rate was low, but not as low as “the good readings” from the second half of last year. It was however “more along the lines of what we want to see”. He reiterated the need to see more good readings like the ones from the second half of 2023 before the FOMC can feel confident that inflation is moving down to 2% on a sustained basis.

Fed Governor Waller spoke before the Feb PCE inflation data was released. He was less sanguine on inflation, noting that Jan had been disappointing in the context of the progress made in the second half of 2023. Despite some differences in how they characterized the current inflation picture, both Governor Waller and Fed Chair Powell came to similar conclusions in speeches this week, that there is still no rush to start cutting rates. Both reiterated that the solid US labor market and growth picture provided the Fed with time to ensure that inflation is on a sustainable path to 2% before starting to cut interest rates to minimize the risk of inflation reigniting.

The run rate of US growth in Q1 continued to edge higher to +2.3% in the latest update of the Atlanta Fed GDPNow cast. This was the result of higher-than-expected growth in personal spending in Feb of +0.8% and a larger contribution from non-residential fixed investment spending. These positive contributions were partially offset by net exports and the change in inventories which both made negative contributions.

Outlook for the week ahead

The spotlight this week shifts to the US labor market and a range of US Fed speeches, including US Fed Chair Powell on the Economic Outlook.

Solid labor market conditions are important to the outlook for the FOMC. At the most recent meeting press conference, guidance provided by the Committee noted that it does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. However, an unexpected weakening of the labor market could warrant a policy response.

Conditions in the labor market in Mar are expected to remain solid. Non-farm payrolls are expected to increase by +205k in Mar (slowing from +275k in Feb). The revisions in Feb were negative, so that will be something to watch in this release. Unemployment is expected to stay unchanged at 3.9% while average weekly hours are also expected to stay unchanged at 34.3. The annual growth in average weekly earnings is expected to slow back down to +4.1%. The JOLTS survey for Feb is expected to show a further easing in job openings to 8.79m (from 8.86m in Jan).

We continue to monitor US weekly initial unemployment claims data which suggests unemployment is likely to stay low in the short-term. Initial claims are expected to stay around the +214k level for last week.

Other US data this week will feed into a further update on US Q1 GDP growth. The US ISM surveys for manufacturing and services will be released this week. Manufacturing conditions are expected to stay in slight contraction while services growth is expected to remain moderate. Factory orders are expected to improve – last week’s advance durable goods orders made a small positive contribution to growth in Q1.

US Fed speeches will feature throughout the week. Of note will be US Fed Chair Powell on Wed speaking on the Economic Outlook, and Fed Governor Kugler also speaking on the outlook for the US economy and monetary policy.

The minutes of the latest ECB and RBA meetings will be released this week.

The prelim Euro Area CPI for Mar will be released this week and will be important ahead of the next ECB meeting on 11 Apr. Headline inflation is expected to slow to +2.5% while core inflation is expected to slow to +3% from +3.1% in Feb.

The full suite of S&P global PMIs for Mar will be released through the week providing a broader view of growth momentum over Q1. Global manufacturing and services PMIs have continued to improve so far through Q1.

This week, the US Treasury will auction and settle approx. $637bn in ST Bills, (including Notes, FRNs, and Bonds auctioned last week) raising approx. $85bn in new money.

QT this week: Approx $10.1bn in ST Bills will mature on the Fed balance sheet and will be reinvested.

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