Key events this week – US PCE inflation & Q2 GDP, Bank of Canada policy meeting, S&P prelim PMIs Jul
Recap from last week
Both US Fed Chair Powell and Fed Governor Waller continued to reiterate the shift to a more balanced focus of the Fed’s dual mandate. Neither signaled a timing on rate cuts. However, Fed Governor Waller noted that data is getting closer to a point where he can be confident to start cutting rates;
So, while I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted. Source: Fed Governor Waller
Governor Waller outlined several possible paths of inflation and the implications for the timing of rate cuts. Between the two likely outcomes, the difference lies in whether a rate cut will occur “in the not too distant future” or if “a rate cut in the near future is more uncertain”. Markets continued to price in the first US rate cut in Sept, with a roughly 50% probability of follow-up cuts in both Nov and Dec (Source: CME Fed Watch Tool). The FOMC meets next week and is likely to provide a signal for the start of the cutting cycle.
US data provided some upside for Q2 growth last week, which included positive revisions for May data. US nominal retail sales for Jun came in as expected at 0% change. The retail control group measure – which feeds into GDP consumption was much stronger than expected at +0.9% growth in Jun. Retail sales growth in May was revised higher, indicating that spending had not been as weak as previously thought. New housing starts were slightly better than expected in Jun (led by multi-family starts), however overall growth in housing starts remains subdued. Growth in industrial production for Jun was higher than expected at +0.6%, with May also revised higher. Initial claims data jumped in the prior week with half of the increase coming from Texas, likely the result of Hurricane Beryl. The Atlanta Fed GDP Nowcast for real GDP growth in Q2 increased to +2.7% by the end of last week – led by a higher contribution from spending and change in private inventories. The official advance measure of US Q2 GDP is out this week and is expected to show growth increasing to +1.9% (annualized) in Q2, up from +1.4% in Q1.
The ECB kept its policy rates on hold, as expected, after delivering its first rate cut at the previous meeting. In Jun, inflation measures were either stable or just edged down and inflation is expected to fluctuate around current levels for the rest of the year. The question of a rate cut at the Sept meeting is ‘wide open’, with the Governing Council adhering to its data-dependent approach. After the meeting, a Bloomberg article indicated some caution over the path of follow-up rate cuts this year;
With inflation pressures still lingering, officials are becoming less confident that a path for two further reductions is realistic, and don’t want investors to assume that a move in September is a done deal, said the people, who declined to be identified because deliberations are private. (Bloomberg)
Outlook for the week ahead
The focus this week will be on the US Fed-preferred measure of inflation, the PCE price deflator. This will be an important release, looking to confirm the improving inflation picture ahead of the FOMC meeting next week.
Headline PCE inflation is expected to increase by +0.1% in Jun, after 0% change in May. The annual rate is expected to slow to +2.5% from +2.56% in May. Core PCE inflation is expected to increase by +0.2% in Jun after increasing by +0.1% in May. Core PCE inflation is expected to increase by +2.6% over the year in Jun, slightly above the +2.57% rate in May.
It is the blackout period for US Fed speeches this week, ahead of the FOMC meeting next week.
The Bank of Canada meets this week and is expected to cut rates again by 25bps. Canadian inflation continued to ease in Jun and the unemployment rate drifted higher. The latest (albeit lagging) May retail sales fell more than expected. The Q2 BoC Outlook Survey maintained the subdued tone from Q1 as firms continued to be pessimistic about discretionary spending and business investment. Despite the lackluster outlook, “few firms plan to reduce headcounts”. At the press conference in Jun, Gov Macklem noted that “if inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate. But we are taking our interest rate decisions one meeting at a time”.
Finally, the S&P prelim PMIs for the key G4 (plus Aus) economies will be released this week for Jul. This will provide the first view of momentum across services and manufacturing activity at the start of Q3.
This week, the US Treasury will auction approx. $696bn in ST Bills, Notes, Bonds, and FRNs, raising approx. $117bn in new money. This includes the 10-year TIPS and 20-year Bond auctioned last week.
QT this week: Approx $8.9bn 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
