Key events this week – Global inflation (UK, NZ, Japan, Canada, Euro area final CPI), RBA & ECB minutes, prelim PMIs, US housing
Recap from last week
The FOMC minutes reflected the decision to increase rates by 25bps despite heightened uncertainty stemming from several high-profile bank failures. While a pause in hikes was considered, the Committee ultimately decided to increase rates because of elevated inflation and the strength of recent economic data. The minutes also noted slower-than-expected progress on disinflation and the uncertain nature of the disinflationary process.
“…upside risks to the inflation outlook remained a key factor shaping the policy outlook, and that maintaining a restrictive policy stance until inflation is clearly on a downward path toward 2 percent would be appropriate from a risk-management perspective.” FOMC Minutes, 21-22 Mar
Actions taken by the central banks had calmed conditions in the banking sector and lessened the near-term risks of a shock to the economy. But the extent to which credit conditions might tighten was still regarded with a high degree of uncertainty. Some participants noted that given the stronger data and persistent inflation, and in the absence of banking sector issues, would have considered a 50bps increase – but judged it prudent to only go 25bps at this time.
US CPI growth continued to ease, slowing to +5% over the year, while measures of core inflation remain elevated and persistent at +5.6% in Mar (+5.5% in Feb). Similarly, the Fed’s ‘super core’ measure was little changed. The key issue is that the disinflation process has stalled over the last few months. But there were several encouraging signs with housing and food price growth easing over the month. The trimmed mean inflation rate slowed again, and more notably over the month. This suggests that inflation pressure may be starting to come from a narrower base of goods & services. But annual trimmed mean inflation is still extremely elevated at +6.2% (+6.5% in Feb).
Other US data showed some softening in momentum. US retail sales growth slowed more than expected by -1% in Mar (-0.2% Feb). In real terms, the annual growth of retail sales has averaged 0.1% over the last 12 months. This month was the first more notable year-on-year decline of 1.9% in real terms. US initial claims remained elevated at 239k – a higher level since the adjustment revisions.
Late in the week, Fed Governor Waller’s speech provided some guidance on the Mar inflation report. Despite slowing housing costs, core inflation had just moved sideways without an “apparent downward trend”. He noted that “we haven’t made much progress on our inflation goal”, leaving him “in about the same place on the outlook at the last meeting, and on the same path for monetary policy”. Policy may need to be tightened further, and the implication of slow progress on inflation was that policy “will need to stay tight for a substantial period, and longer than markets anticipate”. Since the speech, FFR probabilities have been firming for another hike in May, coming back more in line with FOMC projections.
Outlook for the week ahead
More key inflation reports will be released this week. Inflation in Canada is expected to ease to +4.3%. Inflation in the UK is expected to remain elevated at +9.8%. NZ inflation for Q1 is expected to remain elevated at +7.1%. Inflation in Japan is expected to ease but core inflation is expected to stay high at +3.4%. Euro area CPI (final) is expected to be confirmed at +6.9% for Mar.
The RBA and ECB minutes will be released this week. The RBA minutes will reflect the discussion around the decision to pause hikes. The Australian Treasurer has confirmed that the review of the RBA and its operations will be released “in the next week or two”. There will also be a host of Fed and other central bank speeches this week.
Key growth data out of China will be released this week with Q1 GDP and industrial production and retail sales for Mar. Chinese Q1 GDP is expected to increase by +4% year over year.
In the US, the focus will be on housing data for Mar. Recent mortgage application data has reflected some firming in conditions. That said, housing data is expected to be little changed for Mar (SAAR basis); Existing home sales are expected to be 4.50m, permits 1.45m, and starts 1.40m.
At the end of the week, the prelim S&P PMIs will provide the first view of growth momentum for Apr among the G4 economies. The Mar PMIs showed stronger growth momentum across services, helping to offset weaker manufacturing momentum.
This week, the US Treasury will auction and settle approx. $375bn in ST Bills, Notes, and Bonds, raising approx. $8bn in new money. The 17-Day CMB (settled 31 Mar) will mature on 17 Apr, with a paydown of $45bn. This brings the total paydown for the week to $37bn.
The US Treasury will also auction the 20-year Bond and 5-year TIPS this week.
QT: Approx $25.1bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $16.5bn in Notes and Bonds will mature on the Balance sheet (15 Apr) and will be redeemed.
Its also Tax Day on 18 April.
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
