The Macro Outlook for w/c 9 September 2024

by Kim | Sep 9, 2024

Key events this week – US CPI & PPI, ECB policy meeting

Recap from last week

The US labor market hiring continued to slow in Aug while the unemployment rate edged only slightly lower. Last week, US Fed Governor Waller noted that the risks to the labor market have shifted to the downside and aligned with Fed Chair Powell in indicating that it’s time for policy adjustments. His outlook was balanced;

While I don’t see the recent data pointing to a recession, I do see some downside risk to employment that I will be watching closely. But at this point, I believe there is substantial evidence that the economy retains the strength and momentum to keep growing, supported by an appropriate loosening of monetary policy. Source: Speech Fed Governor Waller, 6 Sep 2024

US nonfarm payrolls rose by +142k in Aug, coming in lower than expected, with further notable downward revisions for Jun and Jul. The 3-month average for NFP growth slowed to +116k in Aug, continuing to decelerate since Mar. Job openings dropped sharply at the end of Jul to 7.67m (expecting 8m), with Jun also revised lower. The job openings rate fell to 4.6%. Fed Governor Waller has previously quoted research indicating that a vacancy rate below the 4.5% threshold could result in a “significant increase in the unemployment rate” (source: Governor Waller, speech Jan 16, 2024).

The Fed’s Beige Book reported steady employment across regions, though some companies reduced hours or relied on attrition to manage employment levels. The Beige Book noted that reports of layoffs “remain rare”. The JOLTS layoff rate inched up to 1.1% in Jul but remains relatively low. A notable rise in the Challenger Job Cut Announcements in Aug signaled the potential for an increase in layoffs ahead. High-frequency initial claims, however, have eased, indicating layoffs are not yet a significant concern.

Despite weaker hiring, the US unemployment rate edged down from 4.25% to 4.22% in Aug but still sits above the FOMC’s projection of 4% by the end of 2024. The small fall in the unemployment rate was the result of a rebound in household employment growth while labor force growth slowed. Household employment growth is still especially low on an annual and monthly basis – and this month, employment growth was led by part-time employment, as full-time employment declined.

Uncertainty over the US growth outlook has increased recently, adding to concerns over the labor market. The Beige Book highlighted a weakening or stalling in growth conditions in the 3 months to Sep, but the slowdown seems to be marginal. The US ISM PMIs for Aug indicated offsetting effects of contracting manufacturing activity with a continued modest expansion in services. A more robust reading of the US Q3 growth run-rate is expected next week – but the latest Atlanta Fed GDP Nowcast has Q3 growth remaining around +2.1%.

There is little uncertainty now whether the FOMC will cut rates next week. But despite the lackluster labor report for Aug, markets pared back expectations over the size of the first rate cut, and are currently pricing in a 25bp cut next week (source: CME FedWatch).

Outlook for the week ahead

The focus this week will be on US inflation data.

Ahead of the FOMC meeting next week, the importance of the CPI report for Aug is to reinforce that inflation is on a sustainable path to 2%. Recent Fed speeches suggest that there is already growing confidence that inflation is on that path and that upside risks to inflation have diminished.

US headline CPI is expected to slow to +2.6% in Aug over the year, from +2.9% in Jul. The monthly pace of CPI growth is expected to stay at +0.2%. Core CPI is expected to be little changed at +3.2% over the year in Aug, versus +3.2% in Jul. Over the month, core CPI is expected to increase by +0.2% in Aug, versus +0.2% in Jul.

US headline PPI is expected to slow to +1.8% over the year in Aug, from +2.3% in Jul. Over the month, headline PPI is expected to increase slightly to +0.2% in Aug from +0.1% in Jul. Core PPI is expected to increase to +2.5% in Aug, from +2.4% in Jul. Over the month, core PPI is expected to increase to +0.2% in Aug from 0% in Jul.

Initial claims data is expected to stay little changed, rising slightly to +231k this week, from +227k last week. The trajectory of the initial and continuing claims has remained lower in recent weeks.

The US Presidential debate will be held early this week.

We are also in the blackout period for Fed speeches ahead of the FOMC meeting next week – however, Fed Vice Chair (Supervision) Barr will give a speech this week on the Basel III endgame.

The ECB will meet this week and is expected to cut its policy rate by a further 25bps. The ECB has maintained its data-dependent and meeting-by-meeting approach to determining the level and duration of its policy restriction. Inflation in Aug continued to ease with headline inflation slowing to +2.2% however, core inflation eased only slightly to +2.8%. Growth in Q2 across the Eurozone was lower than previously expected at +0.2%. Recent PMIs have highlighted the ongoing contraction in the manufacturing sector, especially in Germany, while services have expanded moderately, buoyed by the Olympics in France.

There will also be a wide range of China data out this week.

This week, the US Treasury will auction and settle approx. $426bn in ST Bills, with a net paydown of $59bn. The US Treasury will also auction the 3-year and 10-year Notes and 30-year Bonds – and will settle next week.

QT this week: Approx $2.5bn 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

The Macro Outlook for w/c 2 September 2024

by Kim | Sep 2, 2024

Key events this week – US non-farm payrolls & labor market update, ISM surveys, US Fed Governor Waller speech, BoC policy meeting

Outlook for the week ahead

This week, the focus will be on the Aug US labor market update and its implications for the path of US interest rate policy.

The message from Fed Chair Powell at Jackson Hole was clear – “the time has come for policy to adjust” as upside inflation risks have diminished and downside risks to the labor market have increased. He expressed increased confidence that inflation is on a sustainable path back to 2% and last week’s PCE inflation data reinforced that view. On the labor market, the Fed Chair reaffirmed some of his comments from the last FOMC meeting. At the last FOMC press conference, the Fed Chair noted that “I would not like to see a material further cooling in the labor market”. Following the weaker-than-expected Jul labor market data, the Fed Chair was clear in his Jackson Hole remarks; “We do not seek or welcome further cooling in labor market conditions”. After Jackson Hole, markets expect rate cuts to begin at the Sep FOMC meeting. The labor market update for Aug could provide important input for determining the initial pace of that easing. So far, markets are pricing a 25bp cut, but still a chance for a 50bp cut (source: CME FedWatch).

This week’s data will offer a broader view of the US labor market, potentially clarifying if the notably weaker Jul report was an outlier. US non-farm payroll growth in Aug is expected to rebound to +164k from +114k in Jul. The unemployment rate is expected to fall back to 4.2% from 4.3% in Jul. Last month, temporary layoffs contributed to the increase in unemployment, along with faster growth in labor supply – both measures will be in focus this week. The average hours worked is expected to rebound to 34.3 in Aug from 34.2 in Jul. Job openings at the end of Jul are expected to continue to ease further to 8m, from 8.184m at the end of Jun. The layoff rate has remained near the series low while quits have also eased.  Average hourly earnings are expected to rebound over the month to +0.3% and increase by +3.7% over the year. The weekly initial claims data has stabilized around +230k claims/week. Claims are expected to be +235k this week.

There will be several other releases providing insight into the broader US growth context. The ISM manufacturing PMI is expected to show manufacturing conditions remained weaker at 47.8 in Aug. The ISM services PMI is expected to show a slower pace of expansion at 50.9 in Aug from 51.4 in Jul. US factory orders are expected to rebound by +4.5% in Jul from -3.9% in Jun.

The broader US growth context has remained positive. Last week, the Q2 GDP was revised higher in the second estimate from +2.8% to +3% annualized due in part to higher personal spending. With data still limited for the current quarter, the latest Atlanta Fed GDP Nowcast has the growth run-rate easing slightly to +2.5% so far in Q3.

Fed Governor Waller is scheduled to speak on Friday after the US payrolls and labor market data, providing an update on the Economic Outlook. NY Fed President Williams is also expected to speak on Friday. These will be important speeches before the blackout period next week, ahead of the next FOMC meeting on 17-18 Sep.

The Bank of Canada meets this week and is expected to cut rates by a further 25bps. The BoC has already cut rates at its last two meetings. The Canadian labour market update for Aug will be released at the end of the week. Employment growth is expected to rebound to +25k from -2.8k in Jul. However, the unemployment rate is expected to edge higher to 6.5% in Aug from 6.4% in Jul.

Australian GDP growth for Q2 is expected to lift slightly to +0.2% from +0.1% in Q1. At the last RBA meeting, Governor Bullock noted that growth forecasts had been upgraded due to public demand and a lift in household spending as real wages increased. Data revisions indicated that spending may not have been as weak as previously thought. The RBA Governor will give the annual speech to the Anika Foundation this week – and this usually provides an important update on economic conditions.

Finally, the broader suite of S&P Global PMIs will be released this week for Aug.

This week, the US Treasury will auction and settle approx. $681bn in ST Bills, Notes, and Bonds raising approx. $100bn in new money.

QT this week: Approx $3bn 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