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
