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
