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
