Key events this week – US ISM PMIs, global S&P PMIs, Eurozone prelim CPI, Aus; monthly CPI, retail sales, & GDP Q4
Recap from last week
US data mostly confirmed a firming of near-term economic momentum in Jan with a view that this momentum may extend beyond Jan. Rates markets were expecting a slowdown in activity which has yet to materialize more broadly. Current US FFR probabilities are now more in line with the December FOMC ‘dots’, with the FFR peaking around 5.25-5.5% and no cuts for 2023. So far, long rates have remained below last year’s peak.
But there is a large question over how much of the stronger momentum in US consumption and employment data for Jan was due to ‘seasonal factors’. So, it’s the US Feb data in the following two weeks that may provide important confirmation; payrolls (10 Mar), CPI (14 Mar), and retail sales (15 Mar), all leading up to the FOMC on 21-22 Mar. The Feb US CPI and retail sales reports will be released in the blackout period before the FOMC meeting.
US PCE inflation data for Jan was stronger than expected and broadly showed that progress on disinflation had stalled. The monthly and quarterly pace of inflation increased across the headline, core, super-core, median, and trimmed mean inflation numbers. The quarterly trends show that inflation remains sticky. The FOMC will be disappointed but not surprised. The FOMC minutes were clear that “the historical record cautions strongly against prematurely loosening policy” and that “substantially more evidence of progress across a broader range of prices would be required” before declaring inflation was on a ‘sustained downward path’.
Stronger US income growth in Jan supported higher consumption growth and a further increase in the saving rate. US initial claims remained low and below 200k. But weekly mortgage applications fell hard as mortgage rates increased. Regional manufacturing themes remained focused on the weakness in demand, difficulty finding skilled labor, and inflation.
The Feb prelim PMIs were important, indicating an improvement in growth momentum especially across services and manufacturing output. The contraction in US manufacturing output eased, indicating some positive momentum. US services shifted back to expansion in Feb. Overall, manufacturing output shifted back into growth across the Eurozone and the UK but remained weaker in Japan. Services output improved to a more moderate pace of expansion across the G4.
The RBA minutes reflected a shift away from considering a pause in rate hikes – only a 25 or 50bps increase was debated. The guidance appears to be preparing markets for at least another 40bps increase in hikes – and that may be why the “not on a pre-set path” statement was removed last month. This week, Aus monthly CPI is expected to slow to +8.1% in Jan, retail sales growth is expected to rebound by +1.2% in Jan, and GDP in Q4 is expected to increase by +0.9% (QoQ).
Outlook for the week ahead
US survey data for Feb will be a guide for growth momentum in the lead-up to the next few weeks of key Feb data. The US ISM PMIs for Feb are expected to show continued expansion in services, while the softness in manufacturing is likely to persist. There will be several other Feb regional manufacturing surveys released. Initial claims are expected to stay low at +197k. There will be several Fed speeches including Governor Waller on the economic outlook.
Europe; The prelim Eurozone CPI for Feb is expected to ease to +8.2% in Feb. The ECB minutes will be released this week.
Global PMI’s for Feb will provide a broader view of any change in growth momentum.
This week, the US Treasury will auction and settle approx. $438bn in ST Bills, Notes, and Bonds, raising approx. $70.8bn in new money.
QT: Approx $29bn in Notes, Bonds, and ST Bills will mature and roll off the Fed balance sheet this week. Approx $47bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week 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
