Key events this week – US retail sales, Fed speeches; Powell & Waller, ECB meeting, global CPI reports; UK, Canada, Euro Area final, Japan, and NZ, Aus labor market
Recap from last week
US Fed Chair Powell delivered his semi-annual testimony to the US Congress before the release of the latest inflation reports. In his testimony, Fed Chair Powell reiterated recent messages that the FOMC still needs greater confidence that inflation is moving sustainably to the 2% target. More ‘good data’ on inflation would strengthen that confidence. Finally, the focus on the two elements of the dual mandate is now more in balance than they have been in a long time. While most of the focus has been on inflation in recent years, the labor market is “pretty much in balance to where it needs to be” (source: Financial Services Committee).
The US CPI for Jun came in lower than expected and likely qualifies as another good inflation report for the Fed, indicating further progress along the disinflationary path. The headline CPI rate slowed from +3.3% in May to +3% in Jun. The core inflation rate provided some further good news, easing from +3.4% in May to +3.3% in Jun – with most of the deceleration coming from core services and some easing in more persistent shelter price inflation.
The US PPI report for Jun was higher than expected. The headline PPI rate increased to +2.7% in Jun from +2.4% in May. While final demand goods prices fell, led mostly by the fall in energy prices, final demand services price growth accelerated, led by the rising trade services index (wholesale & retail margins). Some of these pressures are not likely to feed into the Fed-preferred PCE inflation gauge (due 26 Jul).
It was overall a quiet week for other US data. The update to the Atlanta Fed GDP Nowcast for Q2 resulted in the GDP run rate lifting to +2% growth from +1.5% at the end of the prior week. Also, after the US inflation data, markets started pricing a 50% chance of a third cut in rates this year (source: CME FedWatch).
The RBNZ met last week and kept rates on hold as expected. The tone of the decision shifted to dovish with guidance acknowledging that while policy will need to stay restrictive, the extent of restraint will be tempered over time as inflation eases. This was a change from the May meeting which indicated that interest rate cuts continued to be delayed. The RBNZ noted a growing body of evidence that excess capacity in the domestic economy is emerging, providing greater certainty that domestic-led price pressures will sustainably decline. The latest NZ Q2 inflation data will be released this week, and this will be an important update for the near-term outlook on NZ rates.
Outlook for the week ahead
Our focus this week shifts to a broader update on US growth for Q2. With the Fed now emphasizing greater balance in achieving its dual mandate, changes in growth momentum will be important for understanding the broader risk to employment outcomes while the Fed seeks greater confidence in reaching its inflation target.
US data this week will start to incorporate the final month of Q2 across consumer spending, housing investment, and industrial output. US retail sales growth in Jun is expected to be flat at 0% change after increasing by +0.1% in May. US industrial production is expected to increase by +0.3% in Jun after rising by +0.9% in May. US housing starts are expected to increase from 1.277m (annualized rate) in May to 1.39m in Jun. New housing permits are expected to be little changed at 1.39m (annualized rate) in Jun.
Two important US Fed speeches will be in focus this week. US Fed Chair Powell will speak on Monday 15 Jul and Governor Waller will speak on the economic outlook on Wed 17 Jul. Next week, the Fed will be in the blackout period ahead of the FOMC meeting on 30-31Jul.
The US election landscape remains in focus. The Republican National Convention will be held this week and is expected to confirm President Trump as the official nominee for President. The Republican Vice President candidate is also expected to be announced at the convention. Uncertainty over the candidacy of President Biden remains elevated.
The ECB will meet this week and is expected to keep policy settings unchanged. The ECB cut rates at the last meeting, noting that the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission supported increased confidence that inflation was converging to target. The ECB continues to reiterate a data-dependent, meeting-by-meeting approach. Since the Jun meeting, progress on inflation has slowed somewhat. This week, the final Euro Area CPI reading for Jun is expected to be confirmed at +2.5% and core CPI at +2.9% over the year.
There will be several inflation reports this week and they will be important for upcoming central bank meetings. UK headline CPI is expected to slow to +1.9% in Jun from +2% in May. Core CPI is expected to be little changed at +3.5% in Jun from +3.5% in May. The next BoE meeting will be on 1 Aug.
Canada’s CPI is expected to ease further. The BoC trimmed mean measure of underlying inflation is expected to slow further to +2.8% in Jun from +2.9% in May. Headline inflation is expected to slow to +0.1% over the month (slowing from +0.6% in May) and to be little changed at +2.9% over the year in Jun. The next meeting of the BoC will be next week on 24 Jul.
The BoJ preferred measure of Japanese inflation ex fresh food is expected to increase slightly from +2.5% in May to +2.7% in Jun.
NZ CPI for Q2 is expected to slow slightly to +0.5% over the quarter from +0.6% in Q1. Annual inflation is expected to stay little changed around +4%.
The Aus labour market update for Jun will be released this week. Employment growth is expected to moderate slightly, while the unemployment rate is expected to be unchanged at 4%. The next RBA meeting will be on 6 Aug and questions remain over whether the RBA may hike again. The more important Q2 CPI will be released before the next RBA meeting on 31 Jul.
Finally, a range of Chinese data was released over the weekend, showing a further moderation in growth over Q2 as domestic demand growth slowed. This supported the view from the Jun trade data last week showing imports falling while export growth remained robust. China’s third plenum will be held this week and is usually a forum for announcing longer-term policy initiatives.
This week, the US Treasury will auction and settle approx. $570bn in ST Bills, Notes, and Bonds raising approx. $74bn in new money. The US Treasury will also auction the 20-year Bond and 10-year TIPS this week – both will settle at the end of the month.
QT this week: Approx $28.5bn in ST Bills, Notes, Bonds, and TIPS will mature on the Fed balance sheet and will be reinvested. Approx $14.7bn in Notes, Bonds, and TIPS 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
