Key events this week – US CPI and retail sales, ECB decision, China data, and Aus labor market
A turbulent week of shifting US monetary policy signaling was capped off by the seemingly rapid collapse of two US banks. Over the weekend, the US Federal Reserve, US Treasury, and the FDIC announced a comprehensive backstop for depositors of the failed banks, and for depositors in the US financial system more broadly, to avoid wider potential funding issues.
Earlier in the week, US Fed Chair Powell’s testimony surprised markets by signaling a willingness to reconsider an increase in the pace of hikes, “if the totality of data were to indicate that faster tightening is warranted”. After the CPI revisions in Jan, the FOMC became concerned that they had not made as much progress on inflation as they had thought.
Since that testimony, broader concern over the financial system has created a greater level of uncertainty for the path of rates. After a round trip during the week, markets are back to pricing a +25bps increase (at the time of writing), and a small probability that the FOMC may pause hikes next week. In this context, the US CPI report on Tuesday is likely even more important to the FOMC and how it may need to address both financial stability and inflation concerns. In light of this heightened uncertainty, there is a risk that the FOMC provides some policy signaling during the blackout period, should there be a need to shift market expectations ahead of the meeting on 21-22 Mar. Despite the blackout period, there is a speech by Board of Governors member Bowman scheduled on Tuesday in Hawaii after the CPI report.
Recap from other events last week
Growth in US payrolls slowed in Feb but remained elevated even after the larger increase in Jan. The trend in slower payroll growth has seemed to stabilize over the last few months. Overall, the US labor market remains strong. Since Nov 22 there has been a further improvement in the participation rate (LFPR) and in Feb, the LFPR for the core working age group reached its pre-pandemic level for the first time in this recovery. While the unemployment rate ticked up in Feb, the demand for labor has mostly absorbed the increase in supply over the last few months. Hours growth remained stalled in Feb while manufacturing overtime hours continued to fall. The average hourly earnings ex-bonus accelerated to +4.6% over the year, while slowing slightly over the month to +0.2%.
US initial claims increased to over +200k last week and this may be something to watch. While the increase in initial claims was concentrated in New York for wk ending 4 Mar, there was a corresponding increase in continuing claims for wk ending 25 Feb – and this data lags initial claims by a week.
The RBA increased rates by a further 25bps to 3.60% and signaled in a speech later that “we are closer to the point where it will be appropriate to pause” and assess the cumulative impact of increases. The RBA cited peaking inflation and shifted its reference to a slowdown in household spending. This week, the Aus labor market report for Feb is expected to remain strong with a +48k increase in employment and a further tick lower in the unemployment rate to 3.6%.
Outlook for the week ahead
It’s still a big week of important US data, including the Feb CPI and retail sales. US CPI for Feb is expected to increase by +0.4% over the month in Feb (from +0.5% in Jan) and by +6% over the year (from +6.4% in Jan). Core inflation is expected to be unchanged at +0.4% over the month and slowing slightly to +5.5% over the year. Other US pricing data out this week includes the PPI and export/import price indexes for Feb.
US retail sales are expected to slow by -0.3% in Feb after a stronger increase of +3% in Jan.
US manufacturing and output data will include the first round of regional Fed manufacturing surveys for Mar. US industrial production for Feb is expected to increase by +0.4% in Feb after no growth in Jan.
The ECB meets on monetary policy this week. The Governing Council has previously signaled a +50bps increase is to be expected at this meeting. Eurozone inflation remains elevated and core inflation continues to increase. The final revision of Q4 GDP released last week showed a slight contraction in GDP for the Eurozone by -0.1%. Falls in consumption and private investment in Q4 were somewhat offset by a larger contribution from net exports (falling imports). This may affect ECB guidance. The ECB has also started QT this Mar and is expected to continue through to Jun at the initial lower rate.
Data out of China for Jan-Feb will be released providing some insight into the rebound in investment, production, and retail sales.
Finally, the BoJ will release the minutes of the last meeting for Governor Kuroda.
This week, the US Treasury will auction and settle approx. $351bn in ST Bills, Notes, and Bonds, raising approx. $46.1bn in new money.
QT: Approx $8bn in ST Bills, Notes, and Bonds will mature and roll off the Fed balance sheet this week. Approx $10.5bn in ST Bills 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
