The Macro Outlook for w/c 6 January 2025
Key events this week – US jobs report Dec, FOMC minutes, Fed speeches, CPI: Euro area, China, and Australia
Recap from last week: Manufacturing activity remains weak in December.
Despite another quiet week for economic data, the Atlanta Fed GDPNowcast for Q4 US GDP growth recorded a marked slowdown. Following the release of the advanced economic indicators on 27 Dec, the GDP nowcast was revised down to +2.6% from +3.1%. It slowed further again to +2.4% after the release of the Dec ISM manufacturing PMI. While this is a notable slowdown, the stronger US services sector PMIs and US jobs data this week should help to balance the view of Q4 growth.
Two key surveys released last week showed continued weakness in the US manufacturing sector in Dec. The ISM manufacturing PMI for Dec showed conditions remaining relatively flat, though improving to a modestly neutral level from the prior month. The S&P manufacturing PMI for Dec also showed the manufacturing sector continuing to contract slightly in Dec. After improving in Nov, sentiment in the outlook for manufacturing output growth eased back again. This week, the US services PMIs will be closely watched to gauge the overall health of the US economy. The expansion in services activity over the second half of 2024 has been offsetting the stalled US manufacturing sector.
There was broadly weaker momentum in manufacturing activity in Dec with the S&P global manufacturing PMI shifting back into slight contraction. Output, orders, employment, and purchase of inputs all declined, but supplier lead times lengthened. Intermediate and investment goods industries remained weaker while activity in consumer goods continued to expand. On a country basis, the strongest expansion in output was recorded in India followed by the Philippines, Spain, Greece, Taiwan, and Canada. The strongest declines in output were again observed in France and Germany – two of the leading manufacturing nations.
Outlook for the week ahead; Focus on the US jobs report and the FOMC.
It will be another short week with the National Day of Mourning for President Carter on 9 Jan 25.
The US jobs report, FOMC minutes, and Fed speeches will likely provide valuable insights and could potentially shape the near-term economic outlook. The release of the FOMC minutes is not yet scheduled on the Fed calendar at the time of writing but should be scheduled for the 8 Jan.
The FOMC minutes and the Fed speeches will be the first substantial input from the Fed since the unexpected hawkish shift at the Dec FOMC meeting. Both could provide valuable information for understanding the Fed’s change in stance. This week, Fed Governor Waller will provide an update on the Economic Outlook. Governor Waller is generally instructive in providing a framework for thinking about the near-term data and implications for policy. In his recent speech on 2 Dec, Governor Waller balanced his remarks on inflation. He noted that while recent data had raised the possibility of stalling inflation progress, he cautioned against overreacting, given that a similar firming of inflation in 2023 had subsided. Also, Governors Cook and Bowman will speak on the economic outlook this week.
The FOMC Dec minutes should provide important insight into the decision to cut rates and signal a shift in its stance that rates are now “significantly closer to neutral” and that it will move cautiously on rate cuts if the economy evolves as expected. Guidance was changed at that meeting to reflect the extent of further cuts would be limited, consistent with being closer to neutral, and that it was now appropriate to slow the pace of adjustments. Fed Chair Powell noted that while the disinflation story remained intact and they are confident on the path to 2% inflation, progress on achieving the 2% inflation target may take longer than expected. This was reflected in the PCE inflation projections out to 2026. The overall decision noted elevated uncertainty in the outlook with the Fed expecting significant policy changes from the incoming Trump administration.
The important point for the Fed’s rate path in the near term is that “as long as the economy and the labor market are solid, we can be cautious about, as we consider further cuts” (source: FOMC Press Conference 18 Dec 24). Fed Chair Powell also noted that “we want to keep the labor market pretty close to where it is now”. The US jobs data this week will therefore be a crucial input for the Fed as it considers its next move on rates. In Nov, payroll job growth had rebounded after the strike and weather disruptions, while the unemployment rate increased back in line with YTD highs. Unexpected labor market weakness could see the Fed quickly shift its outlook, while a stronger, or ‘in line’, jobs report will likely keep the Fed’s path unchanged.
Key factors to watch this week:
- US non-farm payroll growth is expected to slow to +154k, after increasing by +227k in Nov. The direction of revisions to Nov will be important for the underlying trend of payroll growth. Some central banks are increasingly referencing the split between market and non-market (govt) job growth to measure private sector strength.
- From the household survey; the US unemployment rate is expected to be unchanged at 4.25% while the participation rate is also expected to be unchanged at 62.5%. Average hourly earnings are expected to be unchanged at +4% over the year in Dec. The monthly rate is expected to slow to +0.3% in Dec from +0.4% in Nov.
- The JOLTS survey for Nov (lags by a month) is expected to show job openings at 7.77m in Nov, little changed from the Oct level of 7.74m.
Outside of the US, the focus shifts mostly to inflation data.
- Euro area prelim CPI for Dec is expected to be slightly firmer over the year at +2.4% in Dec, up from +2.2% in Nov. Core CPI is expected to be unchanged at +2.7%. The ECB recently noted that its expectations are for inflation to fluctuate in the near term around current levels due to energy price base effects.
- The Aus CPI monthly series for Nov is expected to show headline inflation increasing to +2.3% over the year, up from +2.1% in Oct. This monthly data series is relatively new, with the quarterly report providing a more detailed inflation reading for the RBA.
- China CPI is expected to be little changed at +0.1% over the year in Dec, down from +0.2% in Nov. Chinese trade data will also be released toward the end of the week. Last month, the Chinese trade surplus increased after stronger growth in exports and another decline in imports.
- The S&P Global services PMIs for Dec will be released early in the week, providing the broader picture of private sector activity in the final month of 2024.
This week, the US Treasury will auction and/or settle approx. $470bn in ST Bills, raising approx. $4bn in new money. The US Treasury will also auction $119bn across the 3-year and 10-year Notes and the 30-year Bond this week – all to settle on 15 Jan.
QT this week: Approx $9.1bn 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
