The Macro Outlook for w/c 30 September 2024

by Kim | Sep 30, 2024

Key events this week – US non-farm payrolls, US Fed Chair Powell speech, Eurozone CPI prelim, S&P global PMIs – final

Recap from last week – Signs of progress on US PCE Inflation

Last week, Fed speeches confirmed broad support for the FOMC’s decision to start cutting rates. Speeches indicated that further cuts may be warranted if inflation progresses, or labor market conditions continue to soften. Fed officials noted that future rate cuts would be guided by incoming data, with no predetermined pace for easing. Leading up to the next FOMC meeting in Nov, progress on inflation and labor market conditions will remain a key focus. Faster progress on inflation and/or weaker labor market conditions are likely to edge the FOMC towards a larger rate cut. Markets are currently pricing a 48% probability of a 50bps rate cut in Nov (source: CME FedWatch).

Last week’s release of the Fed-preferred PCE inflation report for Aug showed signs of continued progress – confirming the trend of the Aug CPI. Core PCE remained firmer, remaining at +2.7% in Aug. While core PCE has stalled here for the last few months, it is still on track to slow to the expected +2.6% rate by year-end. Core services inflation, led by a renewed increase in shelter prices, continued to offset the deflationary trend in core goods. At the last FOMC press conference, Fed Chair Powell noted that rent prices were not slowing as fast as expected and that owners’ equivalent rent (OER) was “coming in high”. Powell’s comments suggested that the FOMC is looking through rent inflation in these reports as long as market rent measures trend lower.

The US growth run-rate for Q3 firmed last week, however the message was mixed. Based on the spending, income, GDP, and durable goods data last week, the latest Atlanta Fed GDP Nowcast ticked up to a +3.1% run rate for Q3 so far. The lift in the growth rate was led by an increased contribution from net exports and the change in private inventories. This more than offset the downward effect of the slower pace of personal spending growth in Aug.

The RBA kept its policy rate unchanged at 4.35%, which is still lower than most other central banks. While temporary factors have lowered inflation, the Board noted that inflation remains persistent, and policy must stay “sufficiently restrictive” until inflation sustainably moves toward the target. The Aus CPI for Aug fell due to energy rebates, a decline that the RBA had anticipated. The RBA kept its outlook unchanged, that it did not expect inflation to fall sustainably to target until 2026.

The prelim round of S&P PMIs for Sep showed a downshift in growth in the final month of Q3. The expansion in services remained moderate but did slow – likely reflecting the end of the Olympics. The positive expansion in services helped to cushion a renewed contraction in manufacturing activity, especially in Europe, but also in Aus, and the US. The broader suite of global PMIs will be released this week and will be important to gauge shifts in broader global growth momentum.

The announcement of new stimulus measures in China resulted in a marked improvement in sentiment around the growth outlook. A range of measures were announced last week that aimed to “boost growth, halt the property rout, shore up the stock market, and stabilize employment” (source: Bloomberg).

Outlook for the week ahead – US Fed Chair Powell speech; the economic outlook & US labor market conditions

US Fed Chair Powell will give a speech on the economic outlook early this week (Mon afternoon). He is expected to reiterate points from the recent FOMC meeting and will likely provide his characterization of last week’s PCE price inflation release. There will be several other Fed speeches throughout the week.

At the end of the week, the first of two critical US labor market reports will be released, helping to set the stage for the Nov FOMC meeting. Signs of further cooling in the labor market could see markets price in an increased likelihood for a larger sized rate cut.

US non-farm payrolls are expected to increase by +144k in Sep, after increasing by +142k in Aug. The direction of the prior month’s revisions will be important to the overall view of labor demand. The unemployment rate is expected to be unchanged at 4.2% with the participation rate also expected to be unchanged at 62.7%. Average weekly hours are expected to be unchanged at 34.3.

The JOLTS survey for the end of Aug is expected to show a further slowing in the number of job openings to 7.64m, from 7.67m in Jul.

Average weekly hours are expected to slow to +3.3% over the year, from +3.8% in Aug.

The Challenger job cut announcement report for Sep will also be released. There had been an uptick in job cut announcements to 75k in Aug, especially in the Tech sector. Job hiring announcements were also tepid.

The US ISM manufacturing and services PMI surveys for Sep will be released – and are expected to show manufacturing activity contracting, while services momentum remains modest. Last week, the US S&P prelim PMIs for Sep showed another sharper contraction in manufacturing activity, offset by the continued moderate pace of expansion in services activity.

The Eurozone prelim CPI for Sep will be important for shaping the outlook for the ECB, especially in the context of renewed weakness in activity highlighted by the Sep PMIs. Headline Eurozone CPI is expected to slow to +1.9% over the year in Sep, from +2.2% in Aug. Core inflation is expected to slow to +2.7% over the year in Sep from +2.8% in Aug.

The broader suite of S&P global PMIs will be released this week.

This week, the US Treasury will auction and settle approx. $719bn in ST Bills, Notes, Bonds, and TIPS, raising approx. $132bn in new money.

QT this week: Approx $17.6bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx. $20bn of 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

The Macro Outlook for w/c 23 September 2024

by Kim | Sep 23, 2024

Key events this week – US PCE inflation, Fed speeches, RBA & SNB meeting, Aus CPI, S&P Prelim PMIs Sept

Recap from last week

Last week, the FOMC joined the shift towards easing monetary policy settings. The FOMC began its rate-cutting cycle with a 50bps decrease in the FFR. The key message of the decision was that this was a “recalibration” of policy settings “to something more appropriate given the progress on inflation, and on employment, moving to a more sustainable level”. Fed Chair Powell struck a mostly positive tone in the press conference, describing the economy as ‘in good shape’, ‘growing at a solid pace’, that ‘inflation is coming down’, and that the labor market is in a ‘strong place’. He did address the recent cooling of the labor market, but noted that this rate cut represents an “intention to maintain the strength that we currently see in the US economy”. Future decisions would “go carefully meeting-by-meeting”, and “there’s no sense that the Committee feels it’s in a rush to do this”. The latest SEP indicated a median of approx.100bps of cuts projected for this year, up from 50bps in Jun. Governor Bowman dissented on the FOMC’s decision to cut the FFR by 50bps – preferring a 25bps cut. Governor Bowman noted in a separate statement, “I see the risk that the Committee’s larger policy action could be interpreted as a premature declaration of victory on our price stability mandate”.

US data released last week showed growth has remained solid so far through Q3. The Atlanta Fed GDP Nowcast growth run-rate for Q3 lifted to +2.9% by the end of the week. The largest contributor to the increase though was the change in private inventories, while retail sales, industrial production, and new housing starts all made smaller, but still positive contributions to the acceleration in run-rate for Q3.

Many other central banks have already taken the opportunity to begin to realign policy rates as inflation has eased – and there are still a few exceptions.

After cutting rates for the first time in this cycle in Aug, the BoE kept rates unchanged at this meeting. The Committee noted that “a gradual approach to removing policy restraint remains appropriate”. Inflation remains a concern, with decisions on the Bank Rate guided by the need to “squeeze persistent inflationary pressures out of the system”. The latest UK CPI remained firmer, supporting that cautious and gradual approach by the BoE. Core inflation increased to +3.6% in Aug from +3.3% in Jul, led by a continued firming in services inflation. Headline inflation has remained at around +2.2% for the last few months. The BoE expects CPI inflation to “increase somewhat” over the remainder of this year.

The BoC has cut rates several times now, and as Canadian inflation has eased more notably in recent months, suggests that the BoC may have room for further easing. Canadian CPI in Aug slowed to +2% over the year in Aug. Excluding gasoline, inflation slowed to +2.2% in Aug. The BoC measures of core inflation continued to ease and averaged +2.2% over the year in Aug, down from +2.4% in Jul.

The RBNZ has only recently begun to cut rates, amid concerning signs of weaker growth. The Q2 GDP print last week confirmed that the economy did contract by -0.2% in Q2. With signs that “a variety of core inflation measures are (now) moving consistent with low and stable inflation”, further policy easing by the RBNZ is possible.

The BoJ has remained an outlier – as it has been dismantling some of its monetary accommodation frameworks. After increasing rates last month, the BoJ left its policy settings unchanged in Sept. The decision was based on maintaining accommodative financial conditions to support the infancy and evolution of the ‘virtuous cycle’ from rising prices, wages, and incomes to spending. The latest National Japanese CPI showed inflation continued to firm with a broad-based contribution in Aug. The BoJ preferred measure of inflation, core CPI ex fresh food increased to +2.8% in Aug, up from +2.7% in Jul. The trend of this monthly core rate has stepped up through 2024 and, while not as elevated as in 2023, it appears to be more persistent with the monthly rate at or above +0.3% each month since Mar.

Outlook for the week ahead

Inflation, central banks, and Fed speeches will remain in focus this week.

The US PCE inflation for Aug will be released at the end of the week, providing an update on the Fed’s preferred measure of inflation. Headline PCE is expected to increase by +2.3% in Aug, down from +2.5% in Jul. The monthly rate is expected to be unchanged at +0.2% in Aug. The core PCE rate is expected to increase by +0.2% over the month, which would see the annual PCE inflation rate, lift slightly to +2.7% in Aug.

There will be several other US data releases that will contribute to an update on the Q3 growth run rate. Personal spending is expected to slow to +0.3% over the month in Aug, from +0.5% in Jul. Personal income is expected to increase by +0.4% in Aug, up from +0.3% in Jul. Advance durable goods orders are expected to fall somewhat by -2.8% after the stronger +9% rebound in the prior month.

US initial claims have continued to ease and came in lower at +219k last week after averaging over +230k for the prior twelve weeks. Claims are expected to rise to +226k this week.

There will be a variety of Fed speeches this week. US Fed Chair Powell is scheduled to give pre-recorded opening remarks on Thurs. Fed Governor Bowman will give several speeches this week and may provide more detail on her dissenting rate cut opinion.

The RBA will meet this week and is expected to keep policy settings unchanged. The RBA has yet to cut rates, diverging from other central banks by maintaining its cash rate at a lower 4.35%. At the last meeting, the Board noted that higher rates have helped to bring supply and demand into better balance, but that inflation is remaining persistent and still “some way” above the midpoint of the 2-3% range. The latest labour market report was again positive, with employment growth remaining robust and the unemployment rate edging lower.  The latest monthly CPI report for Aug will be released this week but after the RBA meeting. Headline inflation is expected to slow to +3.1% in Aug.

The SNB will meet this week and is expected to lower its policy rate by 25bps.

Finally, the latest S&P prelim PMIS for Sept will be released this week. This will provide a further update on growth momentum going into the final month of Q3.

This week, the US Treasury will auction and settle approx. $454bn in ST Bills and FRNs, with a net paydown of $1bn. The US Treasury will also auction the 2-year, 5-year, and 7-year Notes this week and all will settle at the end of the month on 30 Sep.

QT this week: Approx $2.6bn of 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

The Macro Outlook for w/c 16 September 2024

by Kim | Sep 16, 2024

Key events this week – FOMC, BoJ, and BoE meetings, US retail sales, CPI: Japan, UK, and Canada

Recap from last week

The US CPI report for Aug was a little mixed given the unexpected firmness in core CPI. Recent comments by Fed Chair Powell have noted that ‘the job is not yet done on inflation’, but there has been a ‘good deal of progress’ towards bringing inflation down. Importantly for this week’s FOMC meeting, the Aug CPI and PPI reports are consistent with that sentiment.

US headline inflation eased notably in Aug. Falling energy prices, slowing food inflation, and some base effects resulted in the annual headline inflation rate falling to +2.5% in Aug. However, a rebound in shelter price growth helped keep the annual core CPI rate unchanged at +3.2%. Other indicators of underlying inflation showed more moderation in Aug. The trimmed mean inflation rate continued to ease and suggests that inflation pressure within the center of the distribution (or, the underlying trend) is moderating. The Fed’s “super core” inflation measure (core services excluding shelter) had been in focus due to its resurgence at the start of the year. While super core inflation slowed to +4.5% in Aug, down from +5% at the start of the year, it remains elevated. The monthly rate held steady at +0.2%, significantly lower than the Q1 average of +0.6%, which suggests it continued to abate.

The ECB cut its deposit facility rate last week by 25bps. ECB President Lagarde noted that ‘given the gradual disinflationary process, it was perfectly appropriate to moderate the degree of monetary restriction”. Guidance was left unchanged with the ECB noting that “it will keep policy rates sufficiently restrictive for as long as necessary” to return inflation to the 2% medium-term target in a timely manner, following a data-dependent approach. Euro area headline inflation was broadly in line with expectations; however, services inflation had been higher than expected. The ECB inflation outlook indicates firmer readings expected through the back half of 2024, but headline inflation is expected to fall to the ECB target “over the second half of next year”. Euro area growth fell short of expectations in Q2, and the growth outlook was revised slightly lower with the ECB noting weaker private domestic demand. Risks to growth remain tilted to the downside.

Outlook for the week ahead

It’s a big week of central bank meetings, global inflation reports, and a robust update on the pace of US growth midway through Q3.

The key event this week is the FOMC meeting, where the Federal Reserve is expected to begin its rate-cutting cycle. In addition to delivering the first rate cut, the meeting will provide insights into how the Fed’s outlook has evolved since Jul. At the Jul meeting, the FOMC signaled a return to a more balanced view of its dual mandate. But with disappointing labor market data, and increasing uncertainty on the growth outlook during the intermeeting period, Fed Chair Powell’s speech at Jackson Hole signaled a shift to protecting against the perceived increase in downside risks to the labor market;

The upside risks to inflation have diminished. And the downside risks to employment have increased.

We will do everything we can to support a strong labor market as we make further progress toward price stability.

The updated SEP, statement, and press conference will be important for outlining the changes to the FOMC outlook and the path of rates amid the moderating labor market. The FOMC is expected to cut rates by at least 25bps this week, but markets are increasingly pricing in the possibility of a larger 50bps cut (source: CME FedWatch).

US data this week will provide a more robust update on the Q3 growth run rate – with consumer spending, industrial output, and housing investment data for Aug. So far in Q3, the Atlanta Fed GDP Nowcast is tracking growth at +2.5% (annualized). US retail sales in Aug are expected to fall by -0.2% in Aug from a more robust +1% in Jul. Industrial production for Aug is expected to stabilize at +0.1% after falling by -0.6% in Jul. New housing permits are expected to remain little changed at 1.41m (annualized) while housing starts are expected to increase to 1.31m (annualized). Initial jobless claims have remained steady around the +230k/week level over recent weeks and are expected to be +232k this week.

The BoE will meet this week and is expected to keep policy rates unchanged, after cutting rates at the last meeting. The decision to cut last month was by a slim 5-4 majority. Before the meeting, UK CPI for Aug will be released. UK headline inflation has slowed through early 2024 and has remained steady recently around the +2% – +2.3% level since Apr. Headline CPI is expected to be unchanged at +2.2% in Aug. Core CPI is expected to increase back to +3.5% in Aug from +3.3% in Jul. Services inflation is easing but remains elevated at +5.2%.

The BoJ will meet this week and is expected to keep policy rates unchanged. However, there could be signaling on the near-term path of rate hikes. Last week, BoJ Board member Nakagawa hinted that policy normalization was still on the agenda and reiterated that “monetary easing will be adjusted if the outlook for Japan’s economy and inflation is realized” and that “the current level of real rates is extremely low” (source: Bloomberg). The latest Japanese CPI for Aug will be released around the same time as the BoJ decision is expected. Headline inflation is expected to be unchanged at +2.8% over the year in Aug. The BoJ core measure of inflation (ex-fresh food) is expected to increase slightly to +2.8% over the year from +2.7% in Jul.

Data out of China for Aug continued to disappoint last week and the PBoC indicated it was “preparing to launch some additional measures, further lower the financing costs for businesses and households, and keep liquidity reasonably ample” (source: Bloomberg). The PBoC is expected to meet this week.

Inflation in Canada is expected to moderate further in Aug. Headline CPI is expected to ease from +2.5% in Jul, with the monthly pace expected to slow to +0.1% in Aug from +0.4% in Jul. The BoC measures of core CPI have slowed more notably recently and averaged +2.4% in Jul, and this is expected to slow further to an average of +2.3% in Aug. The minutes of the latest BoC meeting will also be released this week.

Finally, the Aug labour market survey for Aus will be released this week. Growth in employment in Aug is expected to slow to +26k from the stronger +59k in Jul. Participation is expected to be little changed at 67.1% and the unemployment rate is also expected to be unchanged at 4.2%.

This week, the US Treasury will auction and settle approx. $545bn in ST Bills, Notes, and Bonds, raising approx. $32bn in new cash. The US Treasury will also auction the 10-year TIPS and 20-year Bond this week; both will settle at the end of the month.

QT this week: Approx $2.4bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $5.1bn of Notes and 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