by Kim | Dec 30, 2024
Key events this week – US ISM manufacturing PMI, global PMI’s Dec
Recap from last week: The Atlanta Fed Q4 GDP growth run rate is unchanged.
US economic growth continues to maintain stronger momentum through the second half of 2024.
The final estimate of US Q3 GDP growth was recently revised higher to a +3.1% annualized pace – driven by an acceleration in exports, consumer spending, and federal government spending in the quarter (source: BEA). Based on limited data last week, the Atlanta Fed GDP nowcast for Q4 US GDP growth remained steady at a +3.1% run rate, indicating continued robust economic activity. However, data highlight that pockets of weakness remain, particularly in US residential investment as mortgage rates have again risen. Data last week showed that US new home sales in Nov detracted slightly from growth in Q4, but this was offset by contributions from the durable goods report. Looking ahead to 2025, the US growth backdrop remains positive, amid a hawkish shift by the Fed and the uncertainty surrounding the extent of new Trump administration policies.
In contrast, the minutes from some central banks have highlighted concerns regarding their respective growth outlook.
The latest RBA minutes detailed the shift in the Board’s outlook at the Dec meeting. The Board noted that data had broadly evolved as expected and not enough to shift its forecasts. However, risks that inflation may resolve more slowly had diminished, while downside risks to activity had strengthened. Two points led to this shift in risks; recent weaker activity (Q3 GDP), and wage growth that had slowed by more than expected, suggesting greater capacity in the labour market than had been assumed. Guidance shifted to reflect the Board gaining some confidence that inflation is moving sustainably to the target – “but risks remain”. At the time of the decision, this led markets to begin pricing in the possibility of an earlier rate cut, potentially as soon as Feb, when the next set of forecasts will be released. As of 27 Dec, markets are pricing in a rate cut by Apr.
The BoC deliberations outlined the debate between a 25 or 50bps rate cut at its last meeting. The Governing Council reduced rates by 50bps citing downside risks to its inflation forecast and a weaker growth outlook. Policy settings no longer needed to be “clearly restrictive”. Not all recent data had pointed to a need for a 50bps cut, but the cumulative effect of rate cuts since June would be needed to reduce the slack in the economy and maintain inflation around the 2% target. In light of ‘substantial’ cuts since June, guidance was shifted to expectations for “a more gradual approach” to monetary policy going forward.
Outlook for the week ahead; Another short week, focus on Dec PMIs.
It will be another short week with a quiet data calendar. US data will be limited to the ISM manufacturing PMI, pending home sales, and vehicle sales for Dec.
The full suite of global PMIs for Dec will begin to be released this week and will provide a broad update on momentum in private-sector manufacturing and services activity in the final month of the year.
Key factors to watch this week:
- US ISM manufacturing PMI for Dec – the headline index is expected to be little changed at 48.3 (from 48.4 in Nov). This will feed into a limited update to the Atlanta Fed GDP nowcast for Q4.
- US pending home sales are expected to increase by +0.9% in Nov after +2% in Oct. The slowing in activity partly reflects the renewed increase in mortgage rates since the end of Sept.
- S&P global manufacturing PMI reports for Dec will begin to roll out this week, with the services reports to follow next week.
This week, the US Treasury will auction and/or settle approx. $658bn in ST Bills, Notes, Bonds, and TIPs, raising approx. $35bn in new money.
QT this week: Approx $12bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $18bn in Notes and Bonds will mature on the Fed balance sheet and will be redeemed/roll-off the 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
From our team to yours, we extend warmest wishes for the holidays. May the New Year bring you health and happiness!
by Mofar2016 | Dec 30, 2024
Wishing you and your families a happy and prosperous new year! Thank you for your support. Last week, equities rallied strongly for a corrective 3 waves up before reversing sharply lower on Friday. The onus is on the bears to extend this decline into the new year to help confirm a bigger picture bear reversal. […]
by Kim | Dec 23, 2024
Key events this week – US durable goods orders, RBA & BoJ minutes
Recap from last week: Fed signals shift to a cautious approach to further rate cuts.
The FOMC decision last week signaled a more hawkish shift in the Fed’s stance. Even the decision to cut rates by 25bps last week was described as a “closer call” by Fed Chair Powell. There was one dissenting vote – Beth Hammack preferred to keep policy settings unchanged.
The Fed’s Dec decision reflected a shift away from ‘recalibrating policy’, to being “at or near a point at which it will be appropriate to slow the pace of further adjustments”. After 100bps of cuts over the last three meetings, the Fed signaled that it is now “significantly closer” to the neutral policy rate, and it will be moving cautiously on further rate cuts. The SEP reflected fewer rate cuts for 2025 – with 50bps of cuts penciled in at this stage.
“Nonetheless, we see ourselves as still on track to continue to cut.” Fed Chair Powell, Press Conference 18 Dec 2024
This shift partly stems from a change in the Fed’s view on the upside risk to inflation. While the Fed maintains its belief in the disinflationary trend, it acknowledges that more work needs to be done to bring inflation down. PCE inflation is likely to end the year higher than expected, and FOMC members now project higher headline inflation at the end of 2025, with a longer path back to the 2% target according to the latest SEP. The stalling progress on inflation was acknowledged at this meeting;
So you’ve got, you had two months of higher inflation, September and October, as I mentioned November is back on track but once again we’ve — we’ve had a year-end projection for inflation and it’s kind of fallen apart as we’ve approached the end of the year.
“…inflation has once again underperformed relative to expectations.” US Fed Chair Powell, Press Conference 18 Dec 2024
However, the slower rate cut path also considered that the growth outlook is likely to remain stronger and unemployment stable, while near-term, policy uncertainty remains elevated. New guidance reflected this firmer growth backdrop and slower progress on inflation, emphasizing the need to carefully consider the “extent and timing” of further rate cuts. Fed Chair Powell noted that the FOMC will be looking for further progress on inflation and continued strength in the labor market before considering additional rate cuts.
The Nov PCE inflation report showed some improvement on a monthly basis, with headline inflation moderating to +0.1%. However, the annual inflation rate increased from +2.3% in Oct to +2.4% in Nov, highlighting the Fed’s ongoing concerns. While headline inflation was +2.7% a year ago, most of the 0.26 percentage point decline since then occurred in the first half of the year. Moreover, the projection for headline PCE inflation in 2025 has been revised upward to +2.5%, exceeding the +2.1% projected in Sept.
Core PCE inflation has remained firm, posing a challenge for the Fed. While acknowledging this, Fed Chair Powell highlighted progress in certain areas. In Nov, core PCE inflation remained unchanged at +2.8% year-over-year, with the monthly rate easing to +0.1%. A year ago, core PCE was at +3.2%, with most of the 0.4 percentage point decline occurring in the first five months. This context informs the Fed’s 2025 projection. Core PCE is projected to reach +2.5% by the end of 2025, representing a decrease of only 0.3 percentage points from the November 2024 level. This slower pace of deceleration compared to earlier in the year underscores the challenge for the Fed. Despite this, Fed Chair Powell emphasized that a decline to +2.5% core PCE inflation by the end of 2025 would still represent “significant progress.”
So we and most other forecasters still feel that we’re on track to – to get down to 2 percent it might take another year or two from here, but I’m confident that that’s the path we’re on. US Fed Chair Powell, Press Conference 18 Dec 2024
Both measures of PCE inflation were projected to be at 2% at the end of 2026, as recently as the September projections. The projection of 2% inflation has now been pushed out to the end of 2027.
There was a varied emphasis regarding the other central bank decisions last week.
The BoE kept rates unchanged as expected, however, that decision was based on a 6-3 majority. There seems to be a narrowing path for the BoE; inflation is firm and domestic price pressures are “resolving more slowly” than expected, while near-term activity has been weakening. This is against a backdrop of elevated levels of policy uncertainty based on the Autumn budget measures, geopolitical uncertainties, and trade policy uncertainty.
The BoJ also kept policy rates unchanged and tended to emphasize maintaining more accommodative settings for now. Accommodative financial conditions are aiding the recovery, while inflation is forecast to reach the price stability target in H2 2025. Risks and uncertainty over trade policy remain elevated. Governor Ueda’s press conference seemed to be setting up for a later rate hike;
Ueda said more information on Japan’s wages and the policies of US President-elect Donald Trump is needed before the BOJ can decide on a rate hike. Source: Bloomberg
Outlook for the week ahead; Holiday week, US durable goods orders, and RBA/BoJ minutes.
It will be a short week with a quiet data calendar. US data highlights will be limited to the advance durable goods orders and new home sales – both of which will add to a further update to the Atlanta Fed GDP nowcast for Q4 growth. Several central banks will release minutes this week.
Key factors to watch this week:
- US Durable goods orders for Nov are expected to fall by -0.4% in Nov after increasing by +0.3% in Oct.
- New home sales are expected to increase at an annualized rate of +0.66m in Nov, up from 0.61m in Oct.
This data will top up the robust update on the US Q4 GDP run rate from last week. The Atlanta Fed GDP nowcast has the US Q4 growth run rate currently at +3.1%.
- The Tokyo CPI for Dec will provide an advance read on Japanese inflation for Dec. Tokyo core CPI ex fresh food is expected to increase to +2.5% in Dec, up from +2.2% in Nov.
There will be several central bank minutes released this week;
- The BoC will release the summary of deliberations for its 11 Dec meeting.
- The RBA will release the minutes of its latest meeting in Dec. This should provide some further background behind the shift from a restrictive outlook to a more dovish tone.
- The BoJ will release the minutes of the Oct meeting.
This week, the US Treasury will auction and settle approx. $513bn in ST Bills and FRNs, with a net paydown of -$42bn. The 2-year, 5-year, and 7-year Notes will be auctioned this week and will settle on 31 Dec.
QT this week: Approx $4.6bn of ST Bills will mature on the Fed balance sheet and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
From our team to yours, we extend warmest wishes for the holidays. May the New Year bring you health and happiness!
by Mofar2016 | Dec 23, 2024
Jay Powell was the grinch that stole Xmas in the final FOMC press conference of the year. His hawkish pivot shocked the markets as equities reversed sharply lower as rates and the US$ rallied. The equity leaders (Nasdaq and SPX) reversed impulsively lower to potentially form a near term tradable top but bears need to […]
by Kim | Dec 16, 2024
Key events this week – US Fed rate decision, BoJ & BoE meetings, key data releases; US PCE inflation & retail sales, global CPI reports, and S&P prelim PMIs
Recap from last week: Implication of US inflation on Fed rate cut expectations.
Last week’s firmer US CPI & PPI reports did not change the expectations for a Fed Dec rate cut this week. Markets had mostly priced in a rate cut before the data and this probability edged up after the US CPI & PPI data was released (source; CME Fedwatch).
Firmer headline CPI was driven by larger contributions from food and energy inflation. Progress on core CPI has stalled at around +3.3% for the last four months. However, there were some positive developments within core CPI. Notably, inflation had eased in previously persistent categories such as shelter, core services, and “super core” inflation. The Fed has been anticipating further progress in these areas. Conversely, the deflationary impact of core goods inflation has weakened in recent months. With inflation showing some improvement in specific areas like shelter and core services, the FOMC is likely to maintain confidence in its path toward the 2% target. Nevertheless, the Fed is likely to acknowledge that inflation remains elevated and that achieving the target may take longer than anticipated.
The PPI came in slightly higher than expected. However, markets have focused on the implications of CPI and PPI for the Fed’s preferred PCE inflation measure. Some expectations are for core PCE to round down to a +0.1% rate in Nov and be unchanged at +2.8% over the year. The Cleveland Fed PCE Nowcast suggests a higher expected PCE and core PCE rate for Nov. The broader expectation is for +0.2% core PCE over the month. The FOMC will make its decision this week ahead of the release of the PCE inflation data.
It was the first of two weeks of key central bank decisions to conclude the year. So far, we continue to see a shift towards a less restrictive stance of policy with neutral rate settings as the target, cautious optimism on inflation progress, and some country-specific weakening in the growth outlook.
The first cab off the rank turned out to be China, with the Politburo announcing that it would “embrace a “moderately loose” policy strategy next year” (source: Bloomberg 9 Dec 2024), the first adjustment of its monetary policy stance in over a decade. Further detail is still expected on fiscal programs to support consumer spending and growth in the broader economy.
The RBA kept policy settings on hold. There was a notable shift in its view on inflation and guidance. The Board is now “gaining some confidence that inflationary pressures are declining” but that “risks remain”. The Board is seeing some of the softer data recently, including slower growth, as positive for the inflation outlook. The RBA shifted its guidance; removing reference to needing to be “sufficiently restrictive” on policy, and is no longer “not ruling anything in or out” regarding the next move on rates. Governor Bullock was specific about watching data over the next month. The Aus labour market data for Nov was firmer with the unemployment rate falling back to 3.9%. While employment growth rebounded from a flat month in Oct, the fall in total unemployed persons was also the result of another fall in the participation rate. The firmer labour market conditions remain in contrast to the slower growth environment but are at least supporting the RBA to stay on hold while inflation comes down.
The BoC cut rates by 50bps as expected. The Board noted that, after a “substantial” reduction in rates since Jun, those cuts need some time to flow through to the economy. The policy rate is likely approaching neutral, so the BoC is signaling that it would be moving to a more gradual approach to monetary policy, “evaluating the need for further cuts, one decision at a time”.
The ECB reduced its Deposit Facility Rate by 25bps as expected. The decision was based on its updated assessment of the inflation outlook – that, overall, the disinflation process is continuing. There was a shift in its guidance also; removing reference that “it will keep policy rates sufficiently restrictive for as long as necessary” and removing mention of “restriction” or “duration of restriction”. There was a downbeat view of growth, with the pace of economic recovery slower than expected. From the press conference, the ECB did discuss a 50bps cut at this meeting but deemed the 25bps cut more appropriate, given they still want to see further progress on inflation.
The SNB cut rates by 50bps. The Governing Board noted inflation pressure had decreased again in this quarter, more than expected. The SNB has forecast inflation to average only +0.3% over 2025 – with a high degree of uncertainty over this forecast, and “the development of the Swiss franc is still an important factor”. Without the 50bps rate cut at this meeting, the “conditional inflation forecast would have been lower”. Growth was “only modest” in Q3 and there was a further slight rise in unemployment.
Outlook for the week ahead; Fed’s rate decision amidst key economic releases.
It will be another pivotal week of central bank meetings and key economic data. The Fed is expected to cut rates again and provide a broad context for its policy outlook in 2025. A range of US economic data, including the Nov PCE inflation report, global CPI reports, and S&P prelim PMIs will also be released.
Key factors to watch this week:
- US Fed rate decision; the Fed is expected to cut rates by 25bps at this meeting. The decision details will be a key focus, especially for how the Fed is reading current labor market conditions and inflation firmness. We continue to expect a cautious approach, dependent on labor market conditions remaining positive. This should set the stage for any change in guidance on cuts through 2025. The focus will then shift to the key projections for the broader outlook period (the SEP). This should specifically address changes in the projected path of inflation, growth, unemployment, and the outlook for policy rates.
- Other central banks; The BoJ are expected to keep policy rates unchanged this month, despite recent speeches indicating that “rate hikes are nearing”. Guidance in speeches has been guarded, only noting that there was still a large amount of new data to consider in the lead-up to this meeting, suggesting it could be a live meeting. Similarly, the BoE is expected to keep policy settings unchanged.
- US core PCE Inflation for Nov is expected to increase by +0.2% over the month down from +0.3% in Oct. This would result in core PCE inflation increasing to +2.9% over the year from +2.8% in Oct.
A broad range of US data for Nov that will feed into a robust update on the US Q4 GDP run rate. Currently, the Atlanta Fed GDP nowcast has US Q4 growth running at +3.3%.
- US retail sales are expected to increase by +0.5% over the month in Nov, up slightly from +0.4% in Oct. The Oct retail control was mostly flat at -0.1% – and this is expected to rebound in Nov.
- The PCE personal spending report for Nov is also expected to show a further lift in consumer spending of +0.5% in Nov, up from +0.4% in Oct. Personal income growth is expected to increase by +0.4% after increasing by +0.5% in Oct.
- US housing starts are expected to rebound in Nov to 1.35m annualized, from 1.31m in Oct. Industrial production is expected to increase by +0.2% in Nov after a -0.3% fall in Oct. The first Dec regional manufacturing surveys will be released this week.
Global inflation reports will be in focus this week.
- In Canada, CPI inflation is expected to be +0.1% in Nov, down from +0.4% in Oct. The annual pace should ease from +2%. The BoC core measures of inflation averaged +2.4% in Oct and are expected to ease to +2.3% (avg) in Nov.
- UK headline CPI is expected to increase to +2.6% in Nov from +2.3% in Oct. Core CPI is expected to edge higher to +3.6% in Nov, from +3.3% in Oct. The Oct UK CPI report reflected somewhat broader inflation pressure. The BoE will be looking for some improvement on that this month and will be meeting after the release of this data.
- Japan’s National CPI had been a little firmer in Oct, specifically over the month. The BoJ preferred core CPI ex fresh food is expected to increase to +2.6% over the year in Nov, from +2.3% in Oct. This data will be released after the BoJ meeting announcement.
- The final Euro area CPI for Nov is expected to confirm headline CPI fell by -0.3% over the month and increased by +2.3% over the year. Core CPI is expected to be confirmed at +2.7% over the year in Nov.
Finally, the S&P prelim PMIs for Dec (key G4 developed markets + Aus) will be released early in the week. This will provide some insight into growth momentum in the final month of the year. There is some expectation for a recovery in manufacturing activity in the short term. The Nov PMIs for this group had shown manufacturing continuing to contract, while services growth slowed. The notable exception had been the continued stronger expansion of the US services sector.
This week, the US Treasury will auction and settle approx. $437bn in ST Bills, with a net paydown of -$34bn. The 20-year Bond and 5-year TIPS will be auctioned this week, to settle on 31 Dec.
QT this week: Approx $1.3bn 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
