The Macro Outlook for w/c 28 October 2024

by Kim | Oct 28, 2024

Key events this week – US labor market, PCE inflation, & GDP Q3, Aus CPI Q3, BoJ meeting, Euro Area GDP Q3 & prelim CPI

Recap from last week

It was generally a quiet week of data last week, ahead of the important releases this week.

Commentary in the latest US Fed Beige Book reflected mixed results in the last six weeks. Two districts reported further modest growth while most regions reported little change in activity. There were mixed signals from consumer spending while loan demand remained steady. Uncertainty over mortgage rates affected housing demand. Manufacturing activity declined. Reports on the labor market were mixed. While there were reports of easing demand for workers, layoffs remained limited.

This labor market anecdote is reasonably consistent with the recent trends in initial and continuing claims data. Initial claims have eased further to +231k in the latest week after the recent (expected) spike higher. However, the path of continuing claims has remained higher and reached a new YTD high in the latest week – possibly reflecting some of that easing in labor demand.

The US prelim S&P PMIs for Oct provided a more recent gauge of activity – and there was little change in the moderate pace of expansion between Sep and Oct. The fall in manufacturing activity stabilized while services activity remained little changed from the moderate pace of expansion in Sep.

What has been consistent among the most recent Beige Book, the prelim Oct S&P PMIs, and the regional US manufacturing surveys for Oct is an improvement in the outlook – across both services and manufacturing.

Looking further ahead, having slumped to a 23-month low in September, optimism about output in the coming year rebounded sharply in October, hitting a 29-month high.  Prospects of lower inflation, lower interest rates and stronger economic growth in 2025 also helped instil greater confidence. Source: S&P US Prelim PMI – Oct

The latest Atlanta Fed GDP Nowcast has the US Q3 GDP run rate at around +3.3%, easing only slightly after the weak durable goods report for Sep. The first nowcast for Q4 activity is expected this week.

The Bank of Canada cut rates by 50bps and guided that more cuts are to be expected if the economy evolves broadly as expected. The decision to cut by 50bps was based on the BoC’s determination that inflation has returned to target and is “no longer broad-based,” and that a larger cut was needed to support growth.

The S&P Prelim PMIs for Oct were mixed, but momentum generally eased. Manufacturing PMIs across the G4 (+ Aus) were generally lower, led by larger falls in activity in Japan and the UK. Eurozone and US manufacturing activity improved but remained in contraction. Services activity remained mostly at a modest pace of growth – but still also eased compared to Sep. Services activity in Japan fell markedly and into slight contraction for the month. A slower pace of expansion was also recorded across the Eurozone and the UK services sectors.

Outlook for the week ahead; Important data and implications for central banks.

The upcoming week in the US will be eventful, with key economic data releases ahead of the FOMC meeting on 6 Nov, important tech earnings, and the final week of campaigning in the US Presidential election to be held next week, on 5 Nov.

US labor market, PCE inflation, and Q3 growth data will be in focus this week, providing the FOMC with a comprehensive update on the economy ahead of its meeting. This week is the blackout period for Fed speeches ahead of the FOMC meeting.

The US labor market data for Oct will be important. The unexpectedly strong growth in the Sep payrolls, coupled with recent positive GDP revisions, likely influenced the Fed’s shift towards a more deliberate path of policy easing. It’s unclear at this stage whether the stronger payroll growth in Sep signaled a change in trend for the labor market. Unfortunately, weather and strike-disrupted data in Oct could make it difficult to assess any change in labor market trends. Non-farm payroll growth is expected to ease to +111k in Oct from +254k in Sep. The direction and size of revisions to Sep could be important to the view of the labor market. The unemployment rate is expected to be unchanged at 4.1%. The average work week is expected to stay at 34.2. The number of Job Openings is expected to ease slightly in Sep (data lag by a month) to 7.92m. Average hourly earnings are expected to be unchanged at +4% over the year.

Also on the Fed’s radar is the somewhat firmer CPI for Sep. This week, the Fed preferred PCE inflation gauge will be released for Sep. Headline PCE inflation is expected to be little changed at +2.2% over the year, with monthly inflation expected to be little changed at +0.1%. Core PCE inflation is expected to increase to +0.25% over the month and slow slightly to +2.6% over the year, from +2.7% in Aug. The latest projections are for PCE inflation to end the year around +2.6%. Both personal income and spending for Sep are expected to increase by +0.3% and +0.4% respectively over the month, after increasing by +0.2% in Aug.

The advance US Q3 GDP is expected to increase by +3% annualized. The composition of that growth will be in focus for the FOMC. The ISM manufacturing PMI is expected to improve slightly, but remain in contraction at 47.5 in Oct.

The BoJ will meet this week and is expected to keep policy settings unchanged. Guidance was limited at the last meeting, and with the uncertainty over the election result, this could be the case again. The Japanese general election was held over the weekend and early results suggest the incumbent party has fallen short of a majority, creating some uncertainty over the formation of a new government;

Japan appears set for a weak government either way, an outcome that may complicate the outlook for the Bank of Japan. The central bank, which is trying to seek the right timing for another rate hike, is widely expected to leave rates unchanged during its next scheduled meeting on Oct. 31. Source: Bloomberg 27 Oct 2024

Aus Q3 CPI will be released this week and will be important for the RBA meeting next week, also on 5 Nov. Aus headline Q3 CPI is expected to slow to +2.9% over the year from +3.8% in Q2 – due to the introduction of household energy subsidies. The trimmed mean measure of core inflation is the important statistic and is expected to slow to +0.7% over the quarter in Q3, from +0.8% in Q2. Over the year, the trimmed mean is expected to slow to +3.5% in Q3 from +3.9% in Q2. Persistent inflation has been a key concern for the RBA, and it has been noted that it would be some time before inflation is sustainably at the target. While growth indicators were weak in Q2, labour market conditions in Aus have stabilized through Q3.

The prelim Eurozone CPI for Oct is expected to be slightly firmer. Headline CPI is expected to increase to +1.9% in Oct from +1.7% in Sep. Core CPI is expected to slow to +2.6% in Oct from +2.7% in Sep. The recent messaging from ECB officials is that disinflation is ‘well on track’, despite some lingering concerns over domestic wage pressures. ECB President Lagarde has emphasized the downside surprises in indicators of economic activity recently. The prelim Euro area growth for Q3 is expected to come in at +0.2%, unchanged from +0.2% in Q2, confirming that a low pace of growth persisted into Q3. German GDP for Q3 will be released before the Euro Area growth and is expected to show a continued slight contraction in the economy of -0.1% in Q3 after a similar fall in Q2.

The broader global S&P PMIs for Oct will begin to be released later this week.

This week, the US Treasury will auction and settle approx. $780bn in Notes, Bonds, TIPS, FRNS, and ST Bills, raising approx. $139bn in new money.

QT this week: Approx $25bn of ST Bills, Notes, Bonds, and FRNs will mature on the Fed balance sheet and will be reinvested. Approx $18bn of Notes, Bonds, and FRNs will be redeemed and roll off the Fed balance sheet.

The next release of the US Treasury funding requirement will be this week on 28 Oct and 30 Oct. This will confirm the Q4 funding requirement and provide an estimate for Q1 2025.

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 21 October 2024

by Kim | Oct 21, 2024

Key events this week – US durable goods orders, Fed Beige Book, PBoC & BoC meeting, S&P prelim PMIs

Recap from last week; A More Deliberate Approach for US Rate Cuts Amid Global Inflation Trends

The implications of US data and speeches last week contrasted with those of global CPI reports for central banks last week.

In his speech, Fed Gov Waller reiterated a sentiment similar to that of Fed Chair Powell, about stepping away from the expectation of larger rate cuts to quickly bring the FFR down to neutral. He noted that US data has shifted recently such that further easing should proceed with more caution.

“I view the totality of the data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the Sept meeting”. Speech; Fed Governor Waller, 14 Oct 2024

Wallers’ views on the labor market shifted from concerns over cooling conditions to the unexpectedly strong labor market report for Sep. While the Oct payroll data is likely to be noisy, Waller stated that the stability of the labor market has bolstered his confidence that they can achieve further progress toward the inflation goal. The latest CPI data was disappointing (firmer), but he noted that there are good reasons to think increases will be modest going forward. The important question is how far and how fast for rate cuts? Waller outlined three scenarios for the near-term outlook but none where the Fed reverses its current policy direction. There are conditions where the FOMC may pause cuts, but the bar seems high. Waller’s most likely scenario closely reflects his view of current conditions; ‘strong economic developments’, inflation nearing target, and the unemployment rate moving up only slightly, implying they can move policy rates down to neutral at a deliberate pace.

US data last week supported the view that the economy continues to be better than expected from just a few months ago. The Atlanta Fed GDP Nowcast for Q3 growth increased to a run rate of +3.4% (annualized). The general trend of the nowcast through Q3 has been upwardly rising. The slightly stronger-than-expected increase in retail sales for Sep contributed to a further increase in the GDP nowcast last week. While headline retail sales increased by +0.4%, the control group measures (that feed into GDP calculations) increased by +0.7% in nominal terms. Deflated by CPI though, annual growth in real retail sales is still -0.7% below the same month a year ago. US manufacturing output was weaker, as expected – due to strikes and weather-related effects. Manufacturing activity has generally been weaker in the US recently and the first two Oct regional manufacturing surveys pointed to a continuation of that trend. But what was striking in both the Philadelphia Fed and NY Fed surveys was the continued improvement in the sentiment for future business outlook.

Outside of the US, most CPI data suggested more room for central banks to ease. Canadian headline CPI came in under 2% for the first time in this cycle, at +1.6%. The BoC core measures were unchanged around the +2.2% average of the three measures. The BoC meets this week, and markets are expecting a larger 50bps cut.

NZ CPI slowed to +2.2% in Q3, from +3.3% in Q2. While domestic-led inflation remains elevated, the trimmed mean inflation rate came down to between +2.3% and +2.7% and is now much closer to the headline rate. This will likely give the RBNZ further room for rate cuts to address weakness in economic activity. Labour market data for Q3 is due before the 27 Nov meeting, but markets are expecting a larger cut at this stage.

Progress on UK CPI improved again in Sep after stalling in Aug with headline CPI falling to +1.7%. Core CPI also eased at a faster pace and by more than expected, falling back to +3.2%. The easing wages and inflation picture, together with recent solid labor market data, suggests the BoE may follow in the FOMC footsteps of ‘recalibration’ of policy rates and move policy rates down at a ‘deliberate’ pace. The next meeting of the BoE is on 7 Nov.

The ECB cut rates again last week, despite no new forecasts tabled at the meeting. While guidance did not change, there was an emphasis on weakness in recent economic activity/data. It was noted that the disinflationary process is ‘well on track’, with inflation falling further in Sep to +1.7%, while services inflation remained elevated, but eased to +3.9%.  After the meeting, ECB officials were quoted as saying another cut in Dec “is highly likely” amid expectations that inflation would settle at +2% faster than expected.

There were two outliers last week. The continued strengthening in Aus labour market conditions in Sep suggests that the RBA would need to see inflation fall further before commencing rate cuts. The next RBA meeting is on 5 Nov.

Japanese CPI fell in the month (led by a -6.6% fall in energy prices) while the main BoJ core measures of CPI ex fresh food remained above its target at +2.4%, but slowed from +2.8% in Aug. The BoJ has shifted away from its hawkish signaling in early Aug and has continued to reiterate its caution over the outlook, especially now in the lead-up to the Japanese general election this weekend (27 Oct). The BoJ is expected to keep policy settings unchanged at its meeting on 30 Oct, the following week.

Outlook for the week ahead; Preparing for central bank decisions, elections, and S&P prelim PMIs

The focus now shifts to the outlook for the next several weeks and it will be filled with important central bank decisions, data, and elections.

This will be the last week of US Fed speeches ahead of the usual blackout period (next week) before the next FOMC meeting on 6 Nov. US data of consequence for the FOMC will be released during that blackout period (PCE inflation Sep & labor market Oct). The US Presidential election will be held on the day before the FOMC meeting on 5 Nov.

Many other major central bank meetings are scheduled for the next two weeks and important US earnings for Q3 will also be reported over the next few weeks.

There will be numerous US Fed speeches this week. The IMF and World Bank meetings will be held in Washington and global central bankers are scheduled to speak at various events through the week.

The US Fed will release its Beige Book for Q3, providing anecdotes on the labor market, prices, and general activity.

The main US data release will be durable goods orders for Sep – which are expected to fall by -1.1%. Existing home sales for Sep are expected to increase slightly to a 3.88m annualized rate. Similarly, new home sales are expected to stay little changed at a 0.71m annualized rate in Sep. There will be several regional manufacturing surveys for Oct released this week, along with the S&P prelim PMIs for Oct. We will continue to monitor initial jobless claims. Last week claims eased as expected to +241k, and are expected to stay around that level this week at +245k.

As noted, the Bank of Canada meets this week, and markets are expecting a 50bps cut. The PBoC has cut several of its lending rates at the start of the week.

Finally, the S&P prelim PMIs for Oct will be released this week. These will provide a view of momentum going into the final quarter of 2024. The Sep PMIs had shown a marked weakening in manufacturing activity while services PMIs helped to offset that weakness with continued modest expansion.

This week, the US Treasury will auction and settle approx. $482bn in ST Bills, raising approx. $46bn in new money. The US Treasury will also auction the 5-yr TIPS and 20-yr Bond – both will settle on 31 Oct.

QT this week: Approx $9.4bn 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 14 October 2024

by Kim | Oct 14, 2024

Key events this week – US retail sales, ECB meeting, CPI – Euro Area, Japan, Canada, NZ, and the UK, China data

Recap from last week; FOMC minutes, firmer US CPI, and the spike in initial claims

The FOMC minutes reflected the details of the decision to cut rates for the first time in this cycle by 50bps. While some members noted that there had been a plausible case for a 25bps cut at the Jul meeting, inflation and labor market data during the inter-meeting period were key factors in the decision to cut by 50bps at the Sept meeting. Minutes noted progress on inflation and the Committee had gained greater confidence that inflation was on a sustainable path to 2% despite firmness in rents. The focus, however, had shifted to concerns over cooling in labor market conditions.

Participants agreed that labor market indicators merited close monitoring, with some noting that as conditions in the labor market have eased, the risk had increased that continued easing could transition to a more serious deterioration.

Participants reassessed the balance of risks for the dual mandate; upside risks to the inflation outlook had diminished, while the downside risks to employment had increased. While some participants “would have preferred” a 25bps cut at this meeting, in the end, it was a “substantial majority” of participants that supported a 50bps cut. This was the degree of “recalibration” that would start to bring the stance of monetary policy into better alignment with recent data on inflation and the labor market. In his speech last week, Fed Vice Chair Jefferson reflected on the underlying message from the FOMC minutes; the 50bps cut was to maintain labor market strength. He restated some concern over the labor market – even after the stronger Sep payrolls report.  

The Fed remains in data-dependent mode to determine the pace and degree of easing ahead. Fed Chair Powell has provided his baseline for the rest of the year; 2x25bps cuts if the economy evolves in line with the latest projections. While the US inflation picture for Sept was warmer than expected, initial claims suggested further labor market weakness could be ahead.

US CPI for Sep was higher than expected and the composition of that miss indicated broader inflation effects. Higher food, core goods, and core services prices were offset by the fall in energy prices and slower shelter price increases. Annual core CPI has stalled between +3.2% and +3.3% for the last four months now. The monthly pace has lifted over the last three months to a slightly uncomfortable level of +0.3% a month. The trimmed mean measure of underlying inflation reflected the broader inflation experienced across categories this month, but this was after four months of more benign readings. The Fed is not likely to be derailed by this CPI report and will be encouraged by the long-awaited slowing in shelter price growth. The less good feature was the broader inflation effect, and, while this is not yet a trend, will be important to watch. Together, the PPI and CPI reports suggest that core PCE inflation may come in between +0.2% and +0.3%. The FOMC preferred PCE inflation report is due 31 Oct.

The FOMC will also watch how last week’s spike in initial claims evolves from here. The increase in claims for the wk ending 5 Oct reflects several expected factors; severe weather events affecting numerous states, strike activity, and some layoffs. This mix creates a noisy picture for the FOMC to look through as it approaches the next labor market report before the next meeting. So far, the US growth context has remained steady – with the Atlanta Fed GDP Nowcast lifting to a +3.2% growth run rate for Q3. There will be a broader update to the Q3 growth run rate this week.

The RBNZ cut rates by 50bps at its meeting last week. The RBNZ noted that policy restraint has been reduced, but that it still views policy as restrictive. Economic conditions “provided scope to further ease policy restrictiveness”. This week, NZ inflation for Q3 is expected to increase in the quarter by +0.7% but slow more notably over the year from +3.3% in Q2 to +2.3% in Q3. This may provide further runway for the RBNZ to continue easing policy settings, depending on how labor market and activity data evolve before the final meeting of the year.

Outlook for the week ahead; US retail sales, global CPIs, and the ECB

The focus of US data this week will be on retail sales, housing, and industrial output for Sep, providing a solid update on the final month of Q3 growth data. The initial and continuing claims data will be closely watched. After spiking to +258k last week, initial claims for the wk ending 12 Oct are expected to ease slightly to +241k. The level of continuing claims (lag initial claims by a week) had already started to rise in the wk ending 28 Sept – before the impact of Hurricanes Helene and Milton. The data for wk ending 12 Oct will be the reference week for the next non-farm payroll and household employment survey for Oct.

US retail sales are expected to increase by +0.3% in Sep from +0.1% in Aug. US industrial production is expected to fall slightly by -0.1% in Sep after rising +0.8% in Aug. US housing data is expected to be little changed in Sep; housing starts are expected to remain around the 1.35m annualized pace and new permits are expected to ease to a 1.45m annualized pace.

US Fed speeches this week include Fed Governor Waller speaking on the economic outlook. This should provide insight into how he is incorporating recent inflation and labor market data into his outlook for Fed easing.

The ECB will meet this week and is expected to cut rates by 25bps. Softer inflation and activity data since the last meeting had led ECB officials to hint at the likelihood of a further cut at this meeting. The final Euro Area CPI for Sep will be released this week and headline inflation is expected to ease to +1.8% while core inflation is expected to slow to +2.7%.

UK core CPI is expected to ease to +3.4% in Sep, from +3.6% in Aug.

Headline CPI in Canada is expected to stay little changed at +2.1%, up slightly from 2% in Aug. The summary of the BoC core measures of inflation have eased quickly recently, and slowed to +2.2% on average in Aug. This easing in the ‘broad inflationary pressure’ while the unemployment rate increased had been a key factor in the last BoC decision to cut rates for a third time in Sep.

Japanese National CPI data for Sep is expected to show the BoJ preferred measure of core inflation ex fresh food easing to +2.3% in Sep from +2.8% in Aug. The BoJ meets on 31 Oct, just after the Japanese general election on 27 Oct.

The Aus labour market report for Sep is expected to show employment growth slowed to +25k, down from +47k in Aug. The unemployment rate is expected to be unchanged at 4.2%.

Details of Chinese stimulus measures continue to be drip-fed through official channels. This week, Chinese activity data for Sept and Q3 growth data will be in focus. The Q3 GDP is expected to come in at +4.6%, slightly lower than +4.7% in Q2.

This week, the US Treasury will auction and settle approx. $601bn in ST Bills, Notes, and Bonds, raising approx. $63bn in new money.

QT this week: Approx $11.6bn of ST Bills, Notes, Bonds, and TIPS will mature on the Fed balance sheet and will be reinvested. Approx $7bn in Notes, Bonds, and TIPS will mature 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