The Macro Outlook for w/c 13 May 2024

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

The Macro Outlook for w/c 6 May 2024

by Kim | May 6, 2024

Key events this week – BoE and RBA monetary policy meetings, S&P Global Services PMIs

Recap from last week

The message from the FOMC was clear last week; restrictive policy settings need more time to do their job.

As expected, the FOMC kept interest rate settings unchanged, noting that it would be appropriate to reduce interest rates once it has gained greater confidence that inflation was moving sustainably towards the 2% target. The main driver of this decision was the “lack of further progress towards the Committee’s 2% inflation target” through Q1.

While the FOMC did remove “rates are likely at their peak” from the statement, the easing bias was maintained. The FOMC is prepared to stay on hold for as long as necessary, highlighting that current policy settings were “well positioned” for a range of outcomes; either to stay on hold (where progress on inflation stalls) or to lower rates (progress on inflation resumes and/or there is an unexpected weakening in the labor market). A hike is not likely to be the next move in rates – and the bar seems much higher to consider a hike (needing “persuasive evidence” that policy settings are no longer restrictive).

The FOMC also announced plans to lower the monthly redemption cap on its QT program beginning in Jun.

US data suggested growth and labor market momentum eased at the start of Q2. US non-farm payrolls in Apr were lower than expected at +175k (expecting +243k, while the prior two months were revised higher on net by +22k). Other labor market metrics remained steady – and do not suggest a weakening in the labor market in Apr. The employment growth measure from the household survey has been slowing since late 2023, however, the unemployment rate has only drifted slightly higher. The JOLTS survey continued to point to labor demand ‘coming into better balance’. While still elevated, the vacancy rate fell to 5.1%. Hiring continued to slow. So far, this slowdown in labor demand has not corresponded to a more notable shift higher in unemployment and the involuntary separations rate fell back to a series low of 1.0%. The quit rate is back below the pre-pandemic level, suggesting a reduced willingness to change jobs.

Wage growth has stayed somewhat elevated. The ECI quarterly measure did accelerate over the quarter and remained elevated at +4.1% over the year in Q1. The monthly average hourly earnings report did ease in Apr. Average hourly earnings growth slowed to +0.2% over the month and to +3.9% over the year. The Challenger Job Cut Announcement survey for Apr noted that “The labor market remains tight. But as labor costs continue to rise, companies will be slower to hire, and we expect further cuts will be needed. This low April figure may be the calm before the storm”.

The US ISM surveys also indicated slower growth momentum (also highlighted in the S&P PMIs for Apr) across both manufacturing and services sectors. While activity and employment indexes weakened in both surveys, input price indexes continued to rise driven by commodity prices. A slight fall in aggregate hours and average weekly hours in Apr also suggested a slowdown in the pace of activity.

The pricing of US rate cuts shifted by the end of last week – and is now back to pricing in two cuts for the back half of 2024.

Growth data out of Europe was positive with the Q1 flash Euro Area GDP returning to a moderate pace of growth of +0.3% in Q1, after stalling through Q3 and Q4 last year. The flash Euro Area inflation reading for Apr was mostly in line with expectations however core inflation came in slightly higher at +2.7% (expecting +2.6%) but at least down from +2.9% in Mar. Services inflation fell below 4% to +3.7% in Apr.

Outlook for the week ahead

It will be a quiet week data-wise. The focus will shift to the RBA and BoE monetary policy meetings this week.

The RBA is expected to keep rates unchanged. At the last meeting, the Board shifted to a more neutral stance of policy, no longer overtly suggesting that ‘further increases cannot be ruled out’. However, the most recent Q1 CPI is not likely to have improved the confidence of the Board that inflation is moving sustainably to the 2-3% band. It will be important to see how Governor Bullock characterizes the recent stronger-than-expected inflation, and what it might mean for the path of policy.

The BoE will also meet this week and is expected to keep rates on hold at this meeting. While there has been a continued slowdown in both headline (to +3.2%) and core inflation (to +4.2%) measures over the last few months, inflation remains elevated. It will be important to see how the BoE views the recent disinflation progress relative to its policy settings. The Q1 UK GDP will be released later in the week and growth is expected to rebound to +0.4% in Q1 after falling by -0.3% in Q4 2023.

The US data out this week; the University of Michigan Consumer Sentiment survey (prelim) for May, consumer credit change (Mar), the Q1 senior loan officer survey, and the weekly mortgage applications and initial claims data. There will be several Fed speeches throughout the week.

Canada labor market data for Apr will be released. Employment growth is expected to rebound after falling slightly last month. The unemployment rate is expected to continue to rise to 6.2%. This will be closely watched by the BoC.

The final S&P global services PMIs will be released this week to round out the full view of global growth momentum in Apr. Last week, the final manufacturing surveys were released, and global manufacturing momentum was little changed with the global manufacturing PMI at 50.3 in Apr, down from 50.6 in Mar.

This week, the US Treasury will auction and settle approx. $420bn in ST Bills, with a net paydown of -$13bn. The US Treasury will also auction the 3-year and 10-year Notes and the 30-year Bond this week – all will settle next week on 15 May.

QT this week: Approx $12.6bn 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