The Macro Outlook for w/c 18 November 2024

by Kim | Nov 18, 2024

Key events this week – US housing data, S&P prelim PMIs for Nov, global inflation reports, and RBA minutes.

Recap from last week: Progress on US inflation and implications for the FOMC.

US CPI for Oct highlighted several important points. US inflation has moderated over the past year, however the path to price stability remains a bumpy one. While inflation has slowed from very high levels, progress on core CPI may have stalled more recently. Despite the progress on disinflation, most measures of inflation remain above the Fed’s 2% target, supporting the Fed’s assertion that there is still more work to be done.

US headline CPI accelerated slightly in Oct to +2.6% from the low of +2.4% in Sep. While this represents a slight uptick, it remains below the +3.2% rate recorded a year ago. The 6-month annualized rate has fallen to its lowest level (in this cycle) of +1.4%, suggesting that the near-term inflationary pressure is easing.

However, underlying inflation pressures remain persistent and reflect that bumpy path down to 2%. Core CPI has stalled around +3.3% for the last five months now – and this may concern the Fed. Monthly core CPI has been unchanged at +0.3% over the last three months. In Oct, core goods inflation remained positive (+0.05%) for the second month, compared to the deflationary offset it has provided over the last year. Core services inflation was unchanged at +0.35% over the month. Within core services, the annual rate of shelter inflation has slowed throughout the last year, but it remained unchanged and at an elevated +4.9% in Oct. Even excluding shelter, the annual core services ex-shelter measure remained elevated at +4.6% in Oct – but the 6-month annualized rate of 2.7% suggests some renewed progress.

The trimmed mean is another key measure of the trend in underlying inflation that excludes outlier effects. The US trimmed mean rate was unchanged at +3.2% in Oct but has progressed from +4.1% a year ago. Importantly, the 6-month annualized rate is down to +2.5% (a new low in this cycle), and while it has stalled here for the last three months, it does suggest that the more recent pace of underlying inflation may be easing.  

The PPI also firmed this month across both headline and core measures as expected. The rate of core PPI ex-food and energy has been rising over the last three months and is back up to +3.1% – a year ago this measure was +2.2%. The direction of travel has been higher on both services and core goods PPI through this last year. Together, the CPI and PPI suggest that the Fed’s preferred PCE measure of inflation may remain around +0.3% in Oct for the second month in a row.

The broad message from speeches by Fed Chair Powell & Dallas Fed President Logan last week was; continue to proceed with caution on the path of policy easing. Fed Chair Powell noted that “the economy is not sending any signals that we need to be in a hurry to lower rates”. This has been a consistent message from the Fed Chair. It aligns with the recalibration approach taken by the FOMC to remove policy restriction gradually, rather than rushing to cut rates back down to a more neutral level. Dallas Fed President Logan outlined several risks that she is watching, which included a note that she sees “substantial signs that the neutral rate has increased in recent years, and some hints that it could be very close to the where the FFR is now”.

In these uncertain but potentially very shallow waters, I believe it’s best to proceed with caution. I anticipate the FOMC will most likely need more rate cuts to finish the journey. But it’s difficult to be sure how many cuts may be needed and how soon they may need to happen. Source: Speech, Dallas Fed President Logan, 13 Nov 2024

After US data last week, there was little change to the Atlanta Fed GDP Nowcast for Q4 GDP growth – and the Q4 growth run rate remained at +2.5%. US retail sales growth slowed in Oct to +0.4%, however, the Sep result was revised notably higher from +0.4% to +0.8% growth. US industrial production output declined as expected in Oct given strike activity and disruption from weather events.

Outlook for the week ahead: US housing data, S&P prelim PMIs for Nov, and global inflation reports.

It will be a quiet week for US data with the focus on housing and the S&P prelim PMIs for Nov.

With the recent firming in mortgage rates, and possibly some effect from weather disruptions, US housing data is expected to be little changed overall in Oct. Permits are expected to increase to an annualized rate of 1.44m in Oct (from 1.425m in Sep). New housing starts, which feed into the Atlanta Fed GDP Nowcast, are expected to be slightly lower at 1.34m annualized in Oct (from 1.354 in Sep). Existing home sales for Oct are expected to edge slightly higher to 3.94m annualized, from 3.84m in Sep.

Other US data this week will include some early reads on Nov activity – and these may provide hints on sentiment reaction to the US election result. The reports include regional manufacturing surveys for Nov, the S&P prelim PMIs for Nov, and the University of Michigan consumer sentiment report (final) for Nov.

With US CPI/PPI remaining firmer in Oct, the FOMC will be keeping an eye on indicators of labor market activity in the lead-up to the next meeting and policy decision. With a question mark over the softer Oct payrolls report, the recent easing trend in initial claims has provided some comfort after the spike higher from the effects of the strikes and weather during early Oct. This week, claims are expected to remain low at 220k.

Fed speeches will be limited this week. Of note will be a speech by Governor Cook on the economic outlook and monetary policy.

The prelim S&P PMIs for Nov will be released for the G4 plus Australia. These will provide further insight into private sector growth momentum through to the middle of Q4. The Oct results showed continued lackluster momentum in manufacturing activity, while services activity had remained moderate.

The focus shifts to Oct CPI reports for the UK, Japan, Canada, and the Euro area – with implications for monetary policy.

UK headline CPI is expected to increase to +2.2% in Oct from +1.7% in Sep, while core CPI is expected to edge lower to +3.1% in Oct from +3.2% in Sep. At its last meeting, the BoE reiterated a ‘gradual approach’ to removing policy restriction noting that ‘domestic inflationary pressures have resolved more slowly’.

Canada’s headline CPI is expected to increase to +1.9% in Oct from +1.6% in Sep. The larger fall in Sep was due to the fall in gasoline prices. The BoC measures of underlying inflation have averaged around +2.3% over the last two months and how these measures evolve may be important for the next BoC move. The BoC has cut rates in the last four meetings with a 50bps cut at its last meeting in Oct. It also guided that further cuts are to be expected, depending on how data evolve. Recent labour force data showed a continued fall in the employment rate while the unemployment rate remained unchanged at 6.5%.

In Japan, the main measure of inflation for the BoJ, core CPI ex fresh food, is expected to ease back to +2.2% in Oct from +2.4% in Sep. The fall in monthly inflation in Sep was led by the application of energy subsidies. The core CPI ex fresh food and energy had edged up slightly to +2.1% in Sep. There remains a question mark over the timing of another rate hike by the BoJ. At its last meeting, the BoJ indicated that “if the aforementioned outlook for economic activity and prices will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation”. This week, BoJ Governor Ueda will give several speeches.

The final version of the Euro area CPI for Oct will be released this week. Headline inflation is expected to be confirmed at +2% over the year, while core CPI is expected to be confirmed at +2.7% over the year. At its last meeting, the ECB did cut its policy rate by 25bps, noting recent downside surprises in indicators of economic activity. It also noted that the disinflation process was well underway, but that there were still some factors affecting domestic inflation. ECB President Lagarde will give several speeches this week.

Finally, the RBA minutes of the last meeting will be released this week. At the last meeting, the Board kept rates on hold, noting that inflation, especially underlying inflation remains too high. The RBA is yet to commence cutting rates in this cycle (but its benchmark rate remains at a relatively lower peak than other central banks). Recent labour force data shows labour market conditions remain resilient, and likely not a reason for the RBA to cut rates at this stage.

This week, the US Treasury will auction and settle approx. $532bn in ST Bills raising approx. $71bn in new money. The US Treasury will also auction the 10-year TIPS and 20-year Bond this week – both will settle near the end of the month.

QT this week: Approx $12bn of ST Bills 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 4 November 2024

by Kim | Nov 4, 2024

Key events this week – US Presidential election, FOMC, BoE, and RBA meetings

Recap from last week: Implications of US data for the FOMC

Two recent quotes from US Fed officials provide a framework for assessing the significant data from last week;

“If the economy continues to perform as expected, we’re looking at two more rate cuts by year end – both 25bps cuts”,  US Fed Chair Powell, speech Q&A, NABE Conference, 30 Sep  2024

Data this week remained better than, or is at least tracking the latest Fed projections. But the broad data set aligns the most with Governor Waller’s framework – and suggests no change in the Fed’s path of a deliberate pace of easing.

“The first scenario is one where the overall strong economic developments that I have described today continue, with inflation nearing the FOMC’s target and the unemployment rate moving up only slightly. This scenario implies to me that we can proceed with moving policy toward a neutral stance at a deliberate pace.” Fed Governor Waller, speech, 14 Oct 2024

But with the complexity of the labor market data this month, the FOMC may be more attentive to the downside risks to the labor market leading up to the next meeting in Dec. US payroll growth slowed much more than expected, increasing by a mere +12k, despite already lowered expectations of +111k due to weather and strikes. How much of this weakness was due to the strikes and weather? The BLS notes the likely impact of strikes – making the already declining trend in manufacturing payrolls even worse in Oct. The effect of weather events on payroll growth is not obvious at this stage. However, the downward revisions in Aug and Sept payrolls signaled that the trend of payroll growth continues to slow.

The household survey was less impacted by strikes and weather events due to measurement differences. The BLS reported that 512k people were reported as employed but away from their jobs in Oct due to weather. Despite that, the household survey showed a marked fall in the proportion of people employed. Yet the unemployment rate increased only slightly from 4.05% to 4.15% in Oct – less than what the fall in employment would imply, due to the fall in participation. The rise in unemployed persons was focused on ‘job losers not on temporary layoff’ – suggesting factors other than weather or strikes at play. The FOMC projects the unemployment rate to end the year at 4.4% – which is still a way off, but the direction of travel was back up in Oct. From the JOLTS survey, there was a broad decline in job openings (by industry and region) with the job opening rate falling to Fed Governor Waller’s threshold of 4.5%. On a positive note, recent initial jobless claims data suggest that this additional weakness in labor market data may be short-lived, with claims falling back to 216k last week.

US PCE inflation mostly came in firmer, as expected. Headline PCE eased to +2.1%, while the monthly rate increased by +0.2%. The annual core PCE rate was unchanged at +2.7% while the monthly pace increased by +0.25%. The FOMC projects the core PCE rate to end the year at +2.6%, so currently still traveling above that level. At the last meeting, FOMC officials noted that while inflation has eased notably over the last two years, it remained above the long-term goal of 2%. Governor Waller described progress on inflation as uneven. While he noted that there were ‘good reasons to think increases will be modest going forward’, he would continue to watch the inflation data.

Finally, the advance US GDP for Q3 came in at +2.8% annualized, just slightly below +3% in Q2, but still relatively strong growth. The year-over-year rate slowed to +2.7%, due to a higher base effect – but this remains well above the Fed’s projection of the year-over-year GDP rate of +2% at the end of 2024. The composition of growth in Q3 was favorable, especially led by stronger household consumption. Fixed investment was still positive, but did weaken, while Government spending increased. Overall, this fits well within the broader, supportive context of ‘strong economic developments’.

The BoJ kept its policy settings unchanged as expected. While the decision statement had little detail, the quarterly report and Gov Ueda’s press conference were seen as paving the way for another hike either in Dec or Jan 2025. In his speech afterward, BoJ Gov Ueda noted that the uncertainty over the US economy has “largely receded”. Guidance in the quarterly report noted that, depending on the evolution of prices, activity, and financial conditions;

“…the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.” BoJ Quarterly Report, 31 Oct 2024

The prelim Euro area CPI for Oct was firmer, as expected. ECB officials have been talking down the economic data recently, but the flash GDP result for Q3 growth surprised to the upside – especially in Germany.

Outlook for the week ahead: The US Presidential election & the FOMC

The US Presidential election will be a key focus this week. It is a tight race and uncertainty over the result is high. Getting to a result could be a drawn-out process.

Central bank meetings will also feature this week. The FOMC will be the key meeting – and this will be held a day later than usual with the decision announced on 7Nov.

The FOMC is expected to cut the FFR by 25bps at this meeting. While some data is tracking better than, or is closely aligned with recent projections, the FOMC may be cautious over the risks to the labor market. Uncertainty over the weak Oct labor market data will need to be resolved, so guidance for Dec could be limited, with the Fed favoring that data-dependent approach. It will be important to see how the FOMC characterizes the Oct labor market data. Similarly, it will be important to see how it characterizes the current stickiness of inflation.

The BoE is expected to cut the Bank Rate by 25bps at this meeting after staying on hold in Sep. At the last meeting guidance shifted to “a gradual approach to removing policy restraint remains appropriate”. The Sep CPI data came in better than expected with headline, core, and services inflation easing further. Last week’s higher spending budget has pushed UK bond yields higher, working against expectations of rate cuts.

The RBA is expected to keep policy settings on hold. Recent improvements in labour market data suggested that a larger fall in inflation would be needed to shift the RBA trajectory on rate cuts. The Q3 CPI came in lower, as expected, and mostly in line with RBA forecasts. The fall in headline CPI was heavily impacted by the introduction of government household energy rebates. The trimmed mean at +3.5% in Q3 is still running in line with RBA forecasts, and not improving at a pace that would shift the RBA rate path. 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. Markets are still pricing in the first rate cut in late H1 2025 at this stage.

Other data out this week will be important for upcoming central bank decisions. This includes the NZ Q3 labour market report and the Canadian labour market report for Oct.

The other event this week that could be important for markets is the meeting of the Standing Committee of the National People’s Congress in Beijing from 4-8 Nov (source: Bloomberg). So far, Chinese fiscal support has disappointed markets, but meetings this week could see further measures announced. China’s inflation and trade data for Oct are expected to be released this week.

The final half of the global S&P PMIs for Oct will be released this week.

This week, the US Treasury will auction and settle approx. $482bn in ST Bills, raising approx. $41bn in new money. The US Treasury will also auction the 3-year and 10-year Notes, and the 30-year Bond – all will settle on 15 Nov.

QT this week: Approx $13bn 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