by Kim | May 27, 2024
Key events this week – US PCE inflation, CPI inflation; Euro Area, Aus (monthly), and Tokyo
Recap from last week
A key theme from the FOMC minutes was the lack of further progress on inflation during Q1. While policy rates were seen as sufficiently restrictive, it was likely going to take longer to gain confidence that inflation was moving toward the 2% target. The Committee did not expect that it would be appropriate to reduce rates until it had gained that greater confidence. The FOMC would be prepared to reduce policy restraint if there was an unexpected weakening in the labor market, and alternatively, ‘various participants’ were prepared to tighten policy under certain circumstances. Fed Chair Powell had already addressed the possibility of tightening in the short-term – that a hike was “unlikely to be the next policy rate move” and that the conditions for a hike were notably higher (needing persuasive evidence that policy is not restrictive enough). Overall, “participants assessed that monetary policy was well positioned” to respond to evolving economic conditions.
Since that meeting, the Apr CPI has reignited some hope that inflation has resumed its slowing trend. In a speech, Fed Vice Chair Jefferson noted that “the better reading for April is encouraging”. In a separate speech, Fed Governor Waller gave the April CPI report a “C+” – “not a fail, but not a stellar result either”. He cautioned that progress was so modest, that he still needed to see several more months of “good data” – that which “doesn’t require two decimal places”. The Fed-preferred PCE measure of inflation for Apr will be released this week – and is expected to follow the modest easing trend of the Apr CPI report.
Housing activity in the US remained subdued as existing home sales came in less than expected for Apr, while the Mar result was revised higher. Existing home sales remain 7.5% above the pandemic low recorded in Oct 2023. Inventory continued to increase in Apr. New home sales were also lower than expected in Apr.
The preliminary S&P PMI surveys indicated that private sector activity across the major developed market economies continued to improve in May. This was led by manufacturing activity and output growth in Japan, the Eurozone (slower contraction), the UK, and the US. The more moderate pace of services output growth was maintained in May – led by a notable acceleration in services output in the US. This will likely be positive for Q2 growth – especially in the US.
Headline UK inflation came down notably as expected. However, UK core CPI slowed less than expected to +3.9% as services inflation eased only slightly to an elevated +5.9%. This will likely remain a concern for the BoE. Headline inflation in Canada eased in line with expectations, with a more broad-based slowdown this month – led by food, services, and durable goods. Lower BoC measures of core inflation were encouraging, with the trimmed mean easing to +2.9%. Annual inflation eased in Japan. The main BoJ measure of core CPI ex fresh food slowed from +2.6% in Mar to +2.2% in Apr. However, the monthly pace of inflation has been accelerating over the last three months and the latest 3-month annualized rate is now back up to +2.7%.
Outlook for the week ahead
Inflation remains in focus this week – and importantly how progress on inflation will feed into the broader picture of rates and the path for central bank policy.
The main focus this week will be the US PCE inflation report for Apr. The determination of whether inflation is easing may still come down to two decimal places this month. The main core PCE inflation measure is expected to increase by +0.3% over the month in Apr (around +0.26%). This would bring annual core PCE inflation down slightly to +2.77% from +2.82% in Mar. The monthly headline PCE inflation rate is expected to ease from +0.3% in Mar and the annual headline rate is expected to ease from +2.7%.
Other US data; The monthly PCE spending (and income) data for Apr will be important in comparison to the recent weaker US retail sales report. Personal spending is expected to increase by +0.3% in Apr, slowing from the more robust +0.8% in Mar. The second reading of US GDP growth for Q1 is expected to ease slightly to +1.5% on an annualized basis (from +1.6% in the advance report). There will be a range of Fed speakers this week and the Fed Beige Book will be released, providing some commentary on activity among the Fed districts.
The Euro Area prelim CPI for May will be released this week – along with country-level CPI data throughout the week. Euro Area headline inflation is expected to be +2.5% in May, up slightly from +2.4% in Apr. Core CPI is expected to be unchanged at +2.7% in May.
The Aus monthly CPI for Apr is expected to ease slightly to +3.4% from +3.5% in Mar. The monthly inflation series differs in composition from the broader quarterly inflation report.
The core Tokyo CPI (ex-fresh food) is expected to increase by +1.9% in May, up from +1.6% in Apr.
This week, the US Treasury will auction and settle approx. $668bn in ST Bills, Notes, FRNs, TIPS, and Bonds raising approx. $158bn in new money.
QT this week: Approx $26bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $29bn in Notes & Bonds will be redeemed and will 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
by Mofar2016 | May 27, 2024
Last week, equities pushed to marginal new highs as expected before fading later in the week to potentially complete wave (iii) or (c) up. The markets are becoming more fragmented as the leaders (Nasdaq and SPX) pushed to new ATH's while the laggards (DJIA and Russell) reversed sharply lower. The VIX continues to threaten to […]
by Kim | May 20, 2024
Key events this week – US; FOMC minutes, Fed speak, & Durable goods orders; RBA minutes; RBNZ meeting; CPI – UK, Canada, and Japan; Prelim S&P PMIs for May
Recap from last week
The strength of US inflation and growth through Q1 had supported a shift in the expected path of policy rates in the US. However, Q2 data has so far suggested a deceleration in the stronger US economic momentum, a trend that persisted in data released last week.
US CPI for Apr came in mostly in line with expectations and at least did not surprise to the upside given how persistent inflation has been so far in 2024. The headline and core readings did show progress on inflation slowing – albeit slow progress. This may be seen by the FOMC as one small step, in a series of steps needed over the coming months, to build confidence that inflation is moving ‘sustainably’ back down. There were several encouraging signs from the CPI report; the trimmed mean and median inflation rates suggested that inflation may no longer be broadening out to more categories. Services and shelter inflation also appeared to make more progress on easing this month.
Last week, US data on spending, housing, and output for Apr indicated some easing in growth momentum at the start of Q2. That said, the latest iteration of the Atlanta Fed GDP Nowcast still has growth at a robust pace of +3.6% so far for Q2. Retail sales for April were disappointing as growth stalled and sales growth in Mar was revised lower. New housing permits and starts came in lower than expected. New home builder sentiment also weakened notably, especially in the West. Industrial production stalled, as manufacturing output fell in Apr.
With inflation easing this month and data continuing to be less-hot, rate cut probabilities have firmed around the Sep and Dec FOMC meetings.
Euro area GDP for Q1 was confirmed at +0.3% – rebounding from the weaker growth experienced through Q3 and Q4. Euro area inflation also continued to ease in Apr. Headline inflation was confirmed at +2.4% over the year and +0.6% over the month. Core CPI came in as expected at +2.7% over the year. Recent activity surveys have also pointed to further strengthening in activity in the Euro area at the start of Q2. With inflation easing and activity starting to firm, rate cut expectations beyond the Jun cut may now come into question – from a speech by ECB Board member Schnabel last week;
“Based on current data, a rate cut in July does not seem warranted,” she told Nikkei newspaper in comments published Friday. “We should look very carefully at the data because there is a risk of easing prematurely.” Source: Bloomberg
Aus labour market data was mixed for the RBA. Wage growth in Q1 was lower than expected – led in part by slower public sector wage growth. Growth in real wages increased slightly over the year by +0.5%. Despite employment growth rebounding this month, the unemployment rate ticked higher than expected to 4.05% in Apr. The rise in unemployment this month was the result of employment growth not keeping pace with growth in the labour force (due to higher participation and population growth). It will be important to see whether this increase in labour supply will be absorbed into employment next month. The RBA will likely be watching this closely given that the unemployment rate of 4.05% in Apr is already in line with its forecast for unemployment at the end of Q2.
Outlook for the week ahead
There will be a wide range of data this week.
The focus in the US will likely be on the large number of US Fed speeches scheduled for this week. These should provide some insight into the characterization of the Apr inflation report amid easing growth momentum. Speeches of note: US Fed Vice Chair Jefferson on the Economic Outlook and Housing Price Dynamics and Fed Governor Waller will give several speeches this week, including one on the Economic Outlook and one on R*.
The FOMC minutes of the 30 Apr -1 May meeting will be released. The FOMC kept rates on hold, citing a continued lack of progress on disinflation. The Committee noted that confidence did not increase that inflation was moving sustainably to the 2% target and was prepared to stay on hold for as long as necessary. The FOMC also announced that it was slowing the pace of QT.
US data this week will focus on output and housing. Durable Goods Orders for Apr are expected to slow to -0.5%. Existing home sales are expected to increase to 4.2m annualized in Apr, while new home sales are expected to slow to 0.674m annualized.
The RBA minutes will be released this week. The RBA kept rates on hold at the last meeting due to the recent bout of stickier inflation. The Board remains vigilant to upside inflation risks, with no course of action ruled in or out at this stage, although the Board thinks that it won’t necessarily have to tighten again. At the press conference, Governor Bullock noted that a rate hike was discussed at this meeting, and the minutes should provide some insight into that discussion.
The RBNZ will meet this week and is expected to keep rates on hold.
Inflation data for the UK, Canada, and Japan will be released this week. In both Canada and the UK, inflation remains high but there has been more encouraging progress recently. Both central banks are starting to suggest that the timing of rate cuts could be coming into view as long as inflation progress continues.
UK CPI is expected to ease more notably this month, as base effects kick in. Headline inflation is expected to slow to +2.1% in Apr from +3.2% in Mar. Core inflation is also expected to ease to +3.6% in Apr from +4.2% in Mar.
Progress on inflation in Canada is expected to remain slow. Headline inflation is expected to ease to +2.8% in Apr from +2.9% in Mar. However core inflation measures, such as the trimmed mean are expected to come in under three percent, slowing to +2.9% in Apr from +3.1% in Mar.
Japanese core inflation (ex-fresh food) is expected to slow to +2.2% in Apr, from +2.6% in Mar. Headline inflation is expected to be little changed at +2.7%.
Finally, the prelim S&P PMI surveys for May will be released for the G4 plus Aus. In Apr, manufacturing momentum remained weak but was offset by a continued moderate expansion across services sectors. Activity PMIs for the US in Apr showed some slower momentum while activity remained positive.
This week, the US Treasury will auction and settle approx. $435bn in ST Bills, raising approx. $10bn in new money.
QT this week: Approx $12bn in ST Bills will mature on the Fed balance sheet and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Mofar2016 | May 20, 2024
Last week, equities continued to impulse higher on the back of receding inflationary pressures, weaker US$ and lower rates. The risk-on environment continued as markets embraced the goldilocks recovery with primary equity indices pushing to new ATH's. The market structure remains bullish while we continue to see impulsive rallies and corrective declines with the 50 […]
by Kim | May 13, 2024
Key events this week – US CPI & retail sales; US Fed Chair Powell; Aus budget, labour market, & wages; Europe growth & CPI
Recap from last week
There was limited data released last week. US data focused on lending conditions and consumer sentiment. The University of Michigan consumer sentiment survey recorded a notable (and statistically significant) fall in sentiment in the prelim May report. While the result may be influenced by the change in methodology, there was a corresponding increase in inflation expectations that may have weighed on sentiment. Inflation expectations have eased from recent peaks, but they remain elevated compared to the pre-pandemic trends.
The growth in US consumer credit in Mar was much lower than expected at +$6bn led by (unusual) stalled credit card/revolving credit growth. Non-revolving credit lifted somewhat, but growth rates remain historically subdued. The latest Senior Loan Officer Opinion survey for Q1 noted that while banks reported tighter lending standards for most loan categories in Q1, there were lower net shares of banks reporting tighter lending standards than in Q4. Initial jobless claims were higher than expected at 231k (up from 209k in the prior week). Half of the +20k increase over the week can be traced back to New York and seasonal patterns related to the school year. Initial claims are expected to stay at a slightly elevated +221k level this week though.
The BoE kept policy rates unchanged last week. There was a shift in voting with seven members voting for a hold and two members now voting for a 25bp cut. The Committee noted that the restrictive stance of policy is weighing on activity in the real economy, leading to a looser labour market and bearing down on inflationary pressures. The Committee still judged that policy rates would need to stay restrictive for an extended period. Headline inflation has eased but services inflation remains elevated and persistent. Later, Governor Bailey noted that recent inflation data have been encouraging. In a positive sign for the UK economy, GDP for Q1 increased by more than expected by +0.6% after contracting in the second half of 2023.
The RBA kept rates on hold amid concern over slowing progress on inflation. The Board noted that “we need to be vigilant” to upside risks to inflation and that it would be some time yet before inflation is sustainably in the target range. The Board discussed a rate hike at this meeting but judged that the right stance for now was to stay on hold. Rates were deemed restrictive enough and won’t necessarily have to tighten again, but the Board couldn’t rule another hike in or out. The path of policy rates in Aus has shifted up since the Feb Statement on Monetary Policy – led in part by the higher Q1 inflation print. This week, the federal budget and Q1 wage data will play into the broader inflation picture in Aus.
Outlook for the week ahead
With a range of data out this week, the focus will be on US CPI for Apr and its implications for rate projections.
Progress on disinflation in the US has stalled over the past few months, pushing the timing of rate cuts further out. The FOMC recently noted that “it will likely take more time to gain confidence that inflation is on a sustainable path to 2% inflation”. The data this week is expected to show some progress on inflation. US headline CPI is expected to slow to +3.4% over the year in Apr (from +3.5% in Mar). The monthly headline rate is expected to slow to +0.3% in Apr, from +0.4% in Mar. Core inflation is expected to slow to +3.6% over the year in Apr (from +3.8% in Mar). The monthly core inflation rate is expected to slow to +0.3% in Apr from +0.4% in Mar.
US headline PPI for Apr is expected to be little changed at +2.1% over the year while the monthly pace remains unchanged at +0.2%. Annual core PPI is expected to be little changed at +2.4% with the monthly rate also staying at +0.2%.
There is a broad range of US data out this week that will inform the trajectory of growth so far in Q2. These developments will be reflected in the Atlanta Fed GDPNowcast update for Q2.
US retail sales for Apr are expected to slow to +0.4% from the faster +0.7% in Mar.
Building permits are expected to rebound somewhat to an annualized pace of 1.48m in Apr (from 1.467m in Mar). Housing starts are also expected to rebound to an annualized pace of 1.41m in Apr (from 1.32m in Mar).
Industrial production in Apr is expected to slow to +0.2% from +0.4% in Mar.
Import and export prices are expected to slow over the month in Apr.
There will be a range of Fed speakers this week. The headline event will be Fed Chair Powell in a moderated discussion at the Foreign Bankers’ Association AGM in Amsterdam. Other speakers include Vice Chair Jefferson and Governor Waller. Topics aren’t specifically related to current economic conditions but could be covered. Please check the link above.
It’s also a busy week for data outside of the US. Japanese GDP for Q1 is expected to fall -0.4% from the slow pace of +0.1% growth in Q4.
Euro area GDP for Q1 is expected to be confirmed at +0.3%. Euro area inflation for Apr is expected to be confirmed at +2.4% over the year and +0.6% over the month. Core CPI is expected to be +2.7% over the year.
There will be a range of Aus data out this week. The RBA will be watching closely the direction and impact of the Australian Federal Budget, wage data, and labour market conditions. The wage price index for Q1 is expected to accelerate slightly to +1% from +0.9% in Q4. The labour market survey for Apr will be important for the RBA given its dual mandate. Governor Bullock noted the importance of preserving labour market conditions in her opening press conference statement last week, “The Board wants to keep employment growing while bringing down inflation, and we think rates are at the right level to achieve this”. Employment growth is expected to rebound this month to +25k after net employment edged slightly lower last month. The unemployment rate is expected to increase to 3.9% (from 3.8% in Mar).
Data out of China will also be closely watched after some firming in activity recently. Retail sales, industrial production, and fixed asset investment for the year to Apr will be released this week.
This week, the US Treasury will auction and settle approx. $606bn in ST Bills, Notes, and Bonds, raising approx. $34bn in new money.
QT this week: Approx $35bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $31bn in Notes & Bonds will be redeemed 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
