December 2024 — Mars Capital Partners

The Macro Outlook for w/c 9 December 2024

by Kim | Dec 9, 2024

Key events this week – US CPI & PPI, Central bank decisions; RBA, BoC, ECB, & the SNB

Recap from last week: Mixed signals from the US labor market.

Fed Governor Waller’s speech last week addressed the central question facing the FOMC ahead of its meeting next week: Cut or Skip? Generally resilient conditions have had many questioning how many cuts are needed given US inflation has remained firmer, growth more resilient, and concerns over labor market weakness have abated. US Fed Chair Powell noted in his discussion last week;

“Growth is definitely stronger than we thought, and inflation is coming a little higher,” Mr. Powell said at The New York Times’s DealBook Summit on Wednesday. “The good news is that we can afford to be a little more cautious as we try to find neutral.”

In their speeches, neither Fed Chair Powell nor Governor Waller took a skip off the table for the Dec meeting. However, Governor Waller articulated a much higher bar for data to justify a skip at the next meeting and, is still leaning toward a cut. Fed Chair Powell didn’t provide a direction as to which way he is leaning on a Dec rate decision. Previously, he had indicated a cut in each of the last two meetings of the year if data evolved as they expected – this is still likely to be the case.

The Nov labor market data, a key factor in the Fed’s upcoming decision, presented a mixed picture. While there was a rebound in payroll growth in Nov, conditions in the household survey did not improve. The rebound in payrolls, hours, and nominal earnings indicated resilience. Payrolls and hours worked both recovered from October’s decline, while nominal and real wage growth remained firm. This adds to a positive outlook for household income.

Conversely, the household survey showed no similar rebound, indicating weakness had remained in Nov. The proportion of employed persons continued to decline, and, despite an offsetting fall in participation, the unemployment rate still increased back up to 4.25% – equal to the YTD high. Similarly, the unemployment rate for the core working age group increased to a new YTD high of 3.7% in Nov. While this wasn’t a sharp deterioration in conditions that might worry the Fed, it does suggest that the recent theme on “cooling conditions” remains intact. Hiring has slowed, but layoffs remain near lows. The pool of unemployed persons is rising, and it’s taking longer to find employment amid slower hiring conditions. Finally, research from the San Francisco Fed shows that overall labor market conditions have shifted from tight to one where labor supply now exceeds demand.

Overall, data last week was positive for US growth. As of 5 Dec (not including the jobs report from Fri), the Atlanta Fed GDP Nowcast for Q4 growth edged higher again to +3.3%. The next update will be early this week. After the US jobs report, markets priced in a higher probability of another rate cut by the Fed next week, but no notable increase in the outlook for cuts through 2025 at this stage.

Outlook for the week ahead; US CPI, PPI, and part one of central bank decisions.

The focus will be on two important areas this week. The first is US CPI & PPI reports for Nov and the second is the final round of central bank decisions for the year.

US CPI and PPI reports for Nov are expected to remain firm. Together, the CPI and PPI will provide a good estimate for the Fed-preferred PCE inflation rate for Nov. This will be another crucial input for the Fed decision next week, and for its 2025 outlook. Recent speeches indicate that some Fed members have been ‘less pleased’ about the firmness of inflation, noting that progress on core inflation appears to have stalled. However, the general sentiment has been that conditions indicate “inflation would likely continue to move down towards the Fed’s target.” (source: Bloomberg 3 Dec 2024).

Key factors to watch this week:

US headline CPI for Nov is expected to increase by +2.7% in Nov, up from +2.6% in Oct. The monthly pace is expected to increase by +0.2% in Nov, versus +0.2% in Oct. US core CPI is expected to increase by +3.3% over the year in Nov, unchanged from +3.3% in Oct. Core CPI is expected to increase by +0.3% over the month in Nov, also unchanged from +0.3% in Oct.
US PPI is expected to stay firm. Headline PPI is expected to increase by +2.5% in Nov, up from +2.4% in Oct. The monthly pace is expected to increase to +0.3% in Nov from +0.2% in Oct. Core PPI is expected to increase by +3.3% over the year in Nov from +3.1% in Oct. The monthly pace of core PPI growth is expected to be +0.3% in Nov.

It’s the first of two weeks of key central bank decisions to conclude the year. Within the decisions, we’ll look for any change in guidance. Updated forecasts for 2025 will help to shape the broader outlook for economic activity, rates, and any shift in the stance of central bank policy (restrictive, neutral, or shifting to accommodative?).

This week begins with the RBA, which is expected to keep settings unchanged. The RBA Governor has previously indicated that more than one quarterly CPI report would be needed to confirm a sustained decline in inflation. So, unless the labor market weakens significantly, the earliest potential rate cut could be in Apr or May next year. The RBA will consider the slower-than-expected growth for Q3, especially within the household sector. However, allowing for the treatment of government subsidies paid to households indicates that household spending may have strengthened in Q3. The latest RBA forecasts were released at the start of Nov, so no updates at this meeting. The important Aus labor market report for Nov will be released later in the week – conditions are expected to remain stable, with the unemployment rate edging higher to 4.2%.

The BoC is now expected to cut rates by 50bps this week, following the larger-than-expected rise in the unemployment rate to 6.8% in Nov. Lower inflation and falling interest rates may be fostering early signs of economic recovery. Given the notable increase in the unemployment rate, the BoC may seek to further support economic activity with a larger cut.

The ECB is expected to cut rates by 25bps, and new forecasts will be released. Progress on disinflation continues. Despite the weakening growth outlook, Q3 GDP growth was positive, indicating a rebound in household spending. However, recent weak activity reports and elevated political uncertainty in core Eurozone countries are likely to weigh on the ECB outlook.

Finally, the Swiss National Bank is expected to cut rates by at least 25bps.

The important Chinese Central Economic Work Conference will take place this week. Ahead of this meeting, and at the time of writing, the Politburo shifted its stance on monetary policy for the first time in over a decade, to “embrace a “moderately loose” policy strategy next year” (source: Bloomberg 9 Dec 2024) as officials prepare to address flagging economic conditions and uncertainty over tariffs next year. Chinese CPI, PPI, and trade data for Nov will also be released this week.

This week, the US Treasury will auction and settle approx. $571bn in ST Bills, Notes, and Bonds raising approx. $46bn in new money.

QT this week: Approx $3.2bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $7.1bn in Notes and Bonds 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:

Weekly Macro Outlook – 9Dec2024 Download

Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net

MCP Market Update: December 9th, 2024 – Extended 5th?

by Mofar2016 | Dec 9, 2024

Equities extended higher last week with the Nasdaq and SPX leading the way. The DJIA and Russell continued to lag as rates declined and the US$ fell, warning of a deteriorating growth outlook. The question is whether the Nasdaq and SPX are impulsing strongly higher or forming an ending diagonal / wedge? It will be […]

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The Macro Outlook for w/c 2 December 2024

by Kim | Dec 2, 2024

Key events this week – US non-farm payrolls, Fed Chair Powell & Gov Waller speeches

Recap from last week: Slower progress on US inflation.

The US Fed’s preferred PCE inflation measure for Oct remained firmer, as both headline and core PCE inflation increased slightly. The core PCE inflation rate increased to +2.8% in Oct, exceeding the Fed’s year-end projection. The trend suggests that progress on underlying inflation appears to have stalled since May, reinforcing the challenge for the Fed to achieve its price stability target. Recently, the deflationary offset from core goods has become less pronounced, while core services inflation has continued to firm. Markets have continued to take this slower progress on inflation, amid the broadly resilient economic conditions, into account, with expectations for fewer rate cuts into 2025 (source: CME FedWatch).

An emerging sentiment around slower progress on inflation was reflected in the minutes of the FOMC meeting on 6-7 Nov, which occurred before this suite of firmer inflation data for Oct was released. The minutes highlight that;

“…participants remained confident that inflation was moving sustainably toward 2 percent, although a couple noted the possibility that the process could take longer than previously expected.” Source: FOMC Minutes 6-7 Nov

Despite the “somewhat” elevated core inflation, the discussion outlined the key dynamics expected to guide the path of inflation back down to target. Overall, the committee remained confident that inflation was returning sustainably to 2%. The minutes noted that while labor market conditions had eased from earlier in the year, the unemployment rate remained low. Recent labor market conditions had been affected by “temporary fluctuations from hurricanes”. Economic activity continued to expand at a solid pace. Current conditions supported the decision to further recalibrate the policy stance, “gradually moving towards a more neutral policy stance over time” with a 25bps cut in Nov. In responding to changes in the balance of risks, the minutes showed that the Committee could either hold the policy rate at a restrictive level if inflation remained elevated, or easing could be accelerated if the labor market or growth conditions deteriorated.

One of the themes of inter-meeting Fed speeches has been proceeding cautiously and gradually with rate cuts. Important speeches this week could provide opportunities for the Fed to signal any change in its intentions ahead of the next FOMC meeting, especially in light of the firmer Oct inflation data. This week, Fed Chair Powell’s discussion and Governor Waller’s speech on the economic outlook are particularly important, ahead of the blackout period next week and the Fed meeting the following week on Dec 17-18. For the moment, markets have shifted back towards pricing in a rate cut at the Dec meeting, while pricing in fewer cuts into 2025.

The latest Atlanta Fed GDP Nowcast for Q4 GDP remained little changed during the week. US personal spending and income, housing, and manufacturing data last week was broadly in line with maintaining the run-rate for Q4 GDP at +2.7%.

In Japan, the Tokyo CPI for Nov came in higher than expected. In an interview late last week, BoJ Gov Ueda signaled the possibility its Dec meeting could be ‘live’ for a rate hike decision, but without committing to a path of action;

Ueda last week said it’s “impossible” to predict the result of the next gathering as a large amount of new data was yet to be released in a signal that it will be a live meeting. Source: Bloomberg

In its final meeting for the year, the RBNZ cut rates by 50bps. The monetary policy committee noted that consumer price inflation had eased and was now close to the midpoint of the target range. Economic activity remained subdued while output remained below potential. The Committee expects to further reduce the OCR early next year if conditions continue to evolve as projected.

Outlook for the week ahead; US labor market update and speeches ahead of the Fed’s Dec meeting.

The focus this week will be on the broad update of US labor market conditions in Nov and will provide important input for the FOMC meeting on December 17-18. The Fed has been closely monitoring labor market conditions, especially viewing the notable weakness in non-farm payroll growth in Oct as a temporary event. The return to a more robust job market could reinforce expectations for fewer rate cuts amid the somewhat slower progress on inflation, while a weaker-than-expected report could signal rising expectations of accelerated rate cuts.

Key factors to watch this week;

US non-farm payrolls are expected to increase by +202k in Nov, up from +12k in Oct. Revisions to prior months will be important for determining any shift in the overall trend.
The US unemployment rate is expected to edge up to 4.2% – and this is still below the current Fed projection for the year-end unemployment rate of 4.4%.
Hours and wage growth; Average weekly hours are expected to be unchanged at 34.3 while average weekly earnings are expected to slow slightly to +0.3% over the month, from +0.4% in Oct.
JOLTS; The Job Openings for Oct (lags by one month) are expected to firm slightly to 7.49m in Oct from 7.44m in Sep.

We continue to monitor weekly initial claims data. Initial claims have fallen back down to the modest levels of this year, likely reflecting subdued layoff activity. At the same time, there has been a persistent increase in continuing claims – this could indicate slower hiring conditions. Initial claims for last week (Thanksgiving week), are expected to increase by 215k.

There will be several important Fed speeches this week, ahead of the Fed communication blackout next week. This might be an important opportunity for any shift in signaling by the Fed before the Dec 17-18 meeting. Of note, Fed Chair Powell will take part in a moderated discussion and Governor Waller will speak on the economic outlook early in the week. These speeches are scheduled before the release of Nov non-farm payrolls.

The US ISM surveys for Nov will help to confirm the recent direction of the US S&P PMIs – more widespread growth in services helping to offset lackluster manufacturing activity. The Fed Beige Book will be released this week, providing further insight into regional activity since early Oct.

Aus Q3 GDP is expected to accelerate to +0.5% over the quarter, from +0.2% in Q2. The components of that growth will be important, but generally, the firmer growth will support the RBA in keeping rates unchanged until further progress on inflation.

Finally, the broader global suite of PMIs for Nov will be released. Except for the US, the S&P flash PMIs for Nov offered a sobering view of output growth among larger G4 nations midway in Q4. The manufacturing sectors of the G4 countries remained in contraction, and the previously resilient service sectors had begun to show signs of slowing momentum.

This week, the US Treasury will auction and settle approx. $477bn in ST Bills raising approx. $6bn in new money.

QT this week: Approx $2.4bn of ST Bills will mature on the Fed balance sheet and will be reinvested.