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
