The Macro Outlook for w/c 8 July 2024
Key events this week – US CPI & PPI, US Fed Chair Powell testimony, RBNZ monetary policy meeting
Recap from last week
At the Sintra forum last week, Fed Chair Powell noted that the US had experienced solid growth in the first half, a robust but rebalancing labor market, and inflation showing signs of resuming a disinflationary trend after modest progress in Q1. His message was consistent; the FOMC wants more inflation data to be confident that inflation is moving sustainably down toward 2% before starting the process of loosening policy.
Because the US economy and labour market is strong, we have the ability to take our time and get this right and that what we’re planning to do. US Fed Chair Powell, SINTRA Panel Discussion, Jul 2024
Going into last week, the FOMC view of the US labor market was that the recovery was now mostly back to its pre-pandemic condition of ‘relatively tight, but not overheating’ and a better balance in labor market conditions had been observed.
We see gradual cooling, gradual moving toward better balance. We’re monitoring it carefully for signs of something more than that, but we really don’t see that. US Fed Chair Powell, FOMC press conference, Jun 2024
The Jun labor market data showed more of those balanced conditions; labor demand continued to ease, but there was little evidence that firms were reducing staffing. Non-farm payroll growth has slowed back to around pre-pandemic rates. Employment growth in the household survey has slowed to well below its pre-pandemic rate of growth. The lagging JOLTS survey for May showed job openings remaining firmer – with the vacancy rate increasing slightly to 4.9% – still above the 4.5% rate before the pandemic. The hiring rate slowed to 3.6% in May, and this is now below the 3.9% rate before the onset of the pandemic.
While these indicators suggest labor demand has eased, other data suggest little shift to firms actively reducing employment. The layoff and discharge rate for May stayed at a low of 1.0% (it was 1.3% on the eve of the pandemic). Initial jobless claims have increased through Jun, but have not accelerated, but continuing claims are rising. Despite this, the unemployment rate has continued to drift higher – employment growth has not kept pace with the growth of the labor force since around Nov last year. The unemployment rate increased from 3.96% in May to 4.05% in Jun. The FOMC projection for the unemployment rate is 4.1% at the end of 2024. Fed Chair Powell has referenced the core working age group of 25-54yrs in several speeches – and the unemployment rate for this group increased more notably to 3.5% in Jun from 3.3% in May, and above the 3% unemployment rate recorded just before the pandemic.
The FOMC minutes suggest growing awareness among Committee members that the unemployment rate could increase further now that labor demand has mostly normalized;
Several participants specifically emphasized that with the labor market normalizing, a further weakening of demand may now generate a larger unemployment response than in the recent past when lower demand for labor was felt relatively more through fewer job openings. FOMC Minutes, Jun 2024
In the context of already rising unemployment, the slowdown in the growth run rate for Q2 is important for what it means to the risk of further increases in unemployment while the Fed waits for more confidence on inflation. The latest Atlanta Fed GDP Nowcast for US Q2 GDP growth stepped down further to +1.5% annualized, after starting the week at +2.2%. Weaker ISM surveys for Jun, factory output, construction spending, and vehicle sales data contributed to the lowered growth run rate.
Outlook for the week ahead
With growth slowing and unemployment drifting higher, June’s updated inflation data will be an important input for the FOMC’s policy rate assessment at the end of the month. A continued slowdown in inflation would likely add to the case for the FOMC to consider plans to start cutting rates. The current target rate probabilities have been firming around Sept for the FOMC to commence its rate-cutting cycle (Source; CME FedWatch).
Before the CPI release this week, US Fed Chair Powell will give two days of testimony in his semi-annual monetary policy report to Congress. There will also be several other Fed speeches throughout the week.
This will be followed by the US CPI and PPI reports for Jun. Headline CPI is expected to slow to +3.1% over the year in Jun from +3.3% in May. Monthly headline inflation is expected to be +0.1% in Jun, up from 0% in May. However, core CPI is expected to stay at +3.4% in Jun, unchanged from +3.4% in May. The monthly core inflation reading is also expected to be unchanged at +0.2% in Jun.
US headline PPI inflation is expected to be unchanged at +2.2% in Jun, while the monthly rate is expected to increase to +0.1% in Jun, up from -0.2% in May. Core PPI is expected to rise slightly to +2.5% in Jun, up from +2.3% in May. The monthly core rate is expected to increase to +0.2% in Jun, up from 0% in May.
The Fed-preferred PCE inflation gauge will be released on 26 Jul, just before the next FOMC meeting.
The RBNZ will meet on monetary policy this week and is expected to keep policy settings unchanged.
This week, the US Treasury will auction and settle approx. $487bn in ST Bills, raising approx. $36bn in new money. The US Treasury will also auction the 30-year Bond, 10-year Note, and 3-year Note this week to settle next week.
QT this week: Approx $11.4bn 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
MCP Market Update: July 8th, 2024 – Impulsing higher
The Macro Outlook for w/c 1 July 2024
Key events this week – US – Independence Day, non-farm payrolls, Fed Chair Powell, FOMC minutes, ISM surveys; Europe – ECB Forum on Central Banking, ECB minutes, prelim CPI Jun; Canada labor market; Aus – RBA minutes & retail sales; Global S&P PMIs
Recap from last week
The latest US PCE inflation report marked further progress on inflation for the FOMC, showing an important moderation in inflation for May. PCE inflation measures came in as expected with core PCE slowing to +2.6% – and is below the latest FOMC projection of +2.8% over the year. The trimmed mean inflation rate has now slowed to below 3% for two months in a row. This is likely to be seen as another step in the right direction for the FOMC as it considers when to start easing policy.
However, the decision to start easing policy will be made in the context of the broader US growth and labor market conditions. US growth indicators showed some moderation last week. The final update of Q1 GDP growth was revised slightly higher to +1.4% annualized, however, personal consumption expenditure was revised lower – suggesting a slower pace of consumer spending through Q1.
Data feeding into the Atlanta Fed GDPNowcast for Q2 GDP indicated a moderation in growth from +3% to +2.2% by the end of the week. Personal spending data for May was lower than expected at +0.2% in nominal terms. Spending increased by +0.3% in real terms. Durable goods shipments (ex volatile non-defense aircraft) were flat in May, the first zero-growth month this year. The full Factory Orders (May) release this week will provide a further update on manufacturing activity. Initial claims stayed at +233k, with continuing claims drifting higher. This week’s labor market data will be important in providing a broad update on conditions ahead of the FOMC meeting at the end of the month..
Outside the US, inflation data was firmer. Canadian CPI for May rose to +2.9%, driven by services inflation. Australia’s CPI for May was higher than expected at +4%, up from 3.6% in April. The RBA’s preferred trimmed mean measure rose to +4.4%, highlighting persistent inflation concerns. The upcoming RBA minutes this week will shed more light on inflation and interest rate debates.
Outlook for the week ahead
It will be a shortened US week with the 4th of July Independence Day holiday falling on Thursday.
It’s also a week of substantial data flows.
The focus will be on the broad update of US labor market conditions for Jun and how it impacts the FOMC outlook for rates amid moderating inflation and growth. One of the burning questions is whether the recent, albeit modest, rise in initial claims will be reflected in this report. Non-farm payrolls are expected to increase by +189k in Jun after the notable +272k increase in May. The unemployment rate is expected to stay unchanged at 4%. The JOLTS release for May is expected to show a further moderation in the number of job openings to 7.85m from 8.06m in Apr. Average weekly hours are expected to be unchanged at 34.3. Growth in average hourly wages is expected to be little changed at +4.1%.
US data will provide a further update on Q2 growth with both the ISM manufacturing and services PMIs for Jun. The manufacturing PMI is expected to remain little changed at 49 while services growth is expected to moderate slightly. US Factory Orders for May are expected to moderate to +0.3% over the month, slowing from +0.7% in Apr.
The FOMC minutes of the June meeting will be released this week. The updated projections from the June meeting raised questions about the timing of rate cuts, and the minutes may offer more insight into the conservative inflation projections.
The ECB forum on central banking at Sintra will commence on Monday and close on Wednesday 3 July. US Fed Chair Powell will take part in a panel discussion at the forum.
The ECB minutes of the June meeting will be released this week and should provide more detail about the decision to cut rates at the last meeting. The prelim Euro Area CPI for Jun is expected to continue to moderate. Headline inflation is expected to slow to +2.5% in Jun from +2.6% in Jun, and core CPI is expected to slow to +2.8% in Jun from +2.9% in May.
Finally, the broader suite of S&P global PMIs for Jun will be released this week. The prelim release for Jun was disappointing across the Eurozone, Japan, and Aus. The US was the exception with PMIs indicating a further, modest acceleration in activity in Jun.
Political headline risk continues to simmer this week. The fallout from last week’s Biden and Trump debate may still affect the US election landscape. The UK will hold parliamentary elections this week on 4 July. In Europe, attention is on the first-round results of the French legislative elections and the lead-up to the second round this weekend on 7 July.
The French political world is now embarking on an intense two-day period of horse trading as each party tries to maximize its chances in the final ballot next weekend. Source: Bloomberg
This week, the US Treasury will auction and settle approx. $619bn in ST Bills, Notes, and Bonds, raising approx. $100bn in new money.
QT this week: Approx $9.4bn 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
MCP Market Update: July 1st, 2024 – Mixed Messages
