Key events this week – US CPI, PPI, & retail sales, UK CPI, RBNZ meeting, Aus labour market, GDP; Eurozone, UK, & Japan
Recap from last week
The week began with heightened fears of a slowdown in US growth amid significant market turbulence. Despite a light week for major data releases, the available data still managed to ease growth concerns.
The US ISM services PMI did rebound in Jul, and the improvement was enough to calm the narrative that the US economy was suddenly slowing. The rebound in Jul was moderate at 51.4 with several bright spots including more widespread growth in new orders, output, and employment.
US initial claims data also managed to push back on concerns over US labor market softness. Initial claims came in lower than expected at +233k – and back in line with the 12-week average.
Growth in mortgage applications rebounded more notably (+6.9% over the week) as mortgage rates continued to fall. The rebound in applications was led by refinance applications for now, however, it will be important to track the effect of lower rates on a recovery in housing activity.
The latest US Senior Loan Officer Opinion Survey also hinted that lending standards may not have tightened to the same degree in Q2 compared to Q1;
While banks, on balance, reported having tightened lending standards further for most loan categories in the second quarter, the net shares of banks that reported having tightened lending standards are lower than in the first quarter across almost all loan categories. Source: SLOOS Q2
A speech by BoJ Deputy Governor Uchida helped to calm markets after the BoJ had increased its policy rates and guided further possible rate increases. This was an important speech for signaling on the near-term path of Japanese rates given the volatility in markets, especially in Japan. He summed up by distinguishing the current path of the BoJ and other central banks;
“…in contrast to the process of policy interest rate hikes in Europe and the United States, Japan’s economy is not in a situation where the Bank may fall behind the curve if it does not raise the policy interest rate at a certain pace. Therefore, the Bank will not raise its policy interest rate when financial and capital markets are unstable.” Source: Speech to Local leaders in Hakodate, 7 Aug 2024
The RBA kept policy settings unchanged as expected. The Board noted the increased risk that inflation in Aus will take too long to return to target. The latest CPI data “demonstrated that inflation is proving persistent” and growth expectations were revised higher. In a speech later in the week, Governor Bullock confirmed that the Board’s expectations for when inflation will come back to target have been pushed out. While the Board did discuss a rate hike at this meeting, the decision to stay on hold aligned more strongly with its dual mandate objectives as it “steers a narrow path” between keeping employment growing and inflation slowing”.
S&P Global PMIs indicated that the current expansion slowed at the start of Q3. This was led by a slowdown in global manufacturing activity as the global manufacturing PMI slipped back into contraction and the manufacturing new orders index fell for the first time in six months. This was only partly offset by services output which resumed expanding at a faster pace in Jul, after a brief pause in Jun.
Outlook for the week ahead
The focus this week will likely remain on US inflation and the US growth narrative ahead of the Jackson Hole symposium next week.
The FOMC recently noted that inflation readings don’t need to be ‘better’, and that it just wants more readings around this level to increase its confidence that inflation is slowing. US headline CPI for Jul is expected to be unchanged at +3% over the year, from +3% in Jun. Over the month, inflation is expected to increase by +0.2%, up from -0.1% in Jun. Core CPI is expected to ease to +3.2% over the year, down from +3.3% in Jun. Over the month core CPI is expected to increase by +0.2%, up from +0.1% in Jun.
This week the US PPI report for Jul will be released before the CPI report. The US headline PPI for Jul is expected to be little changed at +2.6% versus +2.6% in Jun. Over the month, PPI is expected to increase by +0.2% – the same pace as Jun. Core PPI is expected to increase by +3% over the year in Jul, while monthly core PPI is expected to slow to +0.2% in Jul from +0.4% in Jun.
The broader US growth context will be in focus this week with the first comprehensive update on growth at the start of Q3 across consumption, output, and housing activity in Jul. US retail sales are expected to increase by +0.4% in Jul, after a 0% change in Jun. Despite the flat growth of headline retail sales in Jun, the increase in the retail control group sales (which feeds into GDP consumption) was notably stronger at +0.9%. This measure is expected to ease in Jul.
US industrial production is expected to ease in Jul. Output is expected to fall by -0.2%, slowing from +0.6% in Jun. This would be broadly in line with weaker output readings across US manufacturing PMIs. The first US regional manufacturing surveys for Aug will provide a guide on momentum through Q3.
The first round of housing data for Jul will be released. Given the falls in mortgage rates, it will be important to gauge the shift in the NAHB homebuilder sentiment index this week – which is expected to be unchanged at 42. New housing permits for Jul are still expected to ease to an annualized pace of 1.43m, from 1.454m in Jun. New housing starts are also expected to ease to an annualized pace of 1.34m in Jul from 1.353m in Jun.
Initial claims are expected to stay low at +232k for the prior week.
The calendar of Fed speeches will be light this week. A more substantial round of signaling on the path of US rates is expected next week at the annual Jackson Hole Symposium on Central Banking (22-24 Aug).
The RBNZ is expected to keep policy settings unchanged, but this could be another finely balanced decision. Last time, the RBNZ noted that policy restraint will be tempered over time as inflation eases further. In Q2, measures of domestically led inflation improved but remained elevated at +5.4%. The Q2 employment report last week could concern policymakers – employment growth was better than expected, but the unemployment rate increased from 4.3% to 4.6% (just below the expectation of a 4.7% unemployment rate).
Finally, the Aus labour market data for Jul will be important for the RBA. The net change in employment is expected to slow to +20k, the participation rate is expected to be unchanged at 66.9%, and the unemployment rate is expected to be unchanged at 4.1%. The Wage Price Index for Q2 will also be released and is expected to increase slightly over the quarter by +0.9%, up from +0.8% in Q1.
This week, the US Treasury will auction and settle approx. $591bn in ST Bills, Notes, and Bonds, raising approx. $55bn in new money.
QT this week: Approx $38bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $15bn in Notes & Bonds 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
