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
