Key events this week – US PCE inflation, spending, housing, and growth, Fed speeches incl Fed Chair Powell, Euro Area & Aus inflation

Recap from last week

There was a further shift to a pause in policy hikes from central banks last week. The FOMC kept rates on hold while the BoE and the SNB both shifted to a pause. The BoJ remained the outlier by maintaining accommodative policy settings.

The FOMC kept rates on hold as expected, maintaining a higher-for-longer outlook for the FFR. Guidance was unchanged with the Committee retaining the option for additional policy firming this year, and penciling in fewer cuts next year, as outlined in the Economic Projections (SEP). The FOMC still sees inflation as too high and is not forecasted to reach targets for some time yet (the US core PCE is not estimated to reach the target until 2026). However, inflation is moving in the right direction, allowing some space to “act carefully” in determining the extent of additional tightening. The Committee wants to see more than three months of progress on inflation and a continued rebalancing of the labor market before it is confident inflation is on a sustainable path lower. Chair Powell noted that they are broadly watching whether the current stronger growth is a threat to the committee’s ability to get inflation back to target or undermine the rebalancing of the labor market. These factors will form part of the “totality of the data” assessment for future decisions. Chair Powell also noted several downside risks to growth going into this final quarter of 2023.

The more resilient US growth currently stands in contrast to concerns over slowing growth noted in other central bank decisions over the last few weeks. The latest was the BoE last week which kept policy rates on hold in another tight 5-4 decision. The Committee noted that policy will need to stay restrictive for “sufficiently long” to lower inflation, however, “some evidence is emerging that the economy is starting to respond”. The BoE noted recent increases in unemployment, inflation easing more than expected in Aug, and “the growth outlook less positive since the last meeting”.

The BoJ maintained its accommodative policy settings, noting “extremely high uncertainties surrounding economies and financial markets at home and abroad”.

The latest round of prelim PMIs for Sep showed growth momentum slowing among the G4 (plus Australia). Services activity has slowed through Q3 while manufacturing activity has remained in contraction. In the Eurozone, both services and manufacturing activity are now in contraction (with a notable deterioration in France this month). In Sep, services growth slowed, but remained moderate in Japan and slowed to a stalled pace in the US. Of note was the stronger fall in the UK services PMI this month, which also noted “solid” declines in staffing levels. In contrast, Aus services activity rebounded from contraction to a modest expansion.

Outlook for the week ahead

Data will focus broadly on US inflation, spending, and growth.

US PCE inflation for Aug is expected to follow the CPI report with a slight increase in the headline rate to +3.5% (from +3.3% in Jul) due to higher energy prices. The monthly pace is expected to increase to +0.5% from +0.3% in Jul. Core PCE is expected to ease to +3.9% from +4.2% in Jul. The monthly pace of core PCE inflation is expected to stay at +0.2%.

US personal spending is expected to slow to +0.5% in Aug from +0.8% in Jul, as personal income growth is expected to increase to +0.4% in Aug from +0.2% in Jul.

The third (final) estimate for US Q2 GDP growth is expected to come in slightly higher at +2.2%.

US new home sales are expected to moderate further to 0.700m (SAAR) from 0.714m in Jul. US housing data was mixed last week; home builder sentiment continued to fall, permits were higher, starts were sharply lower (led by a fall in activity in the West, likely weather-related), and existing home sales continued to fall. Existing home sales fell to 4.040m (SAAR) in Aug, which is now just above the pandemic low of 4m (Jan 2023).

US durable goods orders for Aug are expected to fall slightly by -0.4% after falling by -5.2% in Jul (due to large value orders in Jun).

There will be several US Fed speeches this week, including Fed Chair Powell (Town Hall event for educators).

Other data in focus this week will be the prelim Euro area CPI for Sep. Headline CPI growth is expected to slow to +4.6% in Sep (from +5.2% in Aug). Core CPI is expected to also ease to +4.9% in Sep (from +5.3% in Aug).

The monthly Aus CPI is expected to show inflation increasing slightly to +5.2% in Aug from +4.9% in Jul.

This week, the US Treasury will auction and settle approx. $577bn in ST Bills, Notes, Bonds, TIPs, and FRNs raising approx. $110bn in new money. This brings the unofficial Q3 quarter-to-date total of new money raised to approx. $1,038bn (Est was $1,007bn).

The US Treasury will auction the 2-year, 5-year, and 7-year Notes this week, and, together with the 20-year Bond, these will settle on 2 Oct next week.

QT this week: Approx $6.5bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $29.2bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be redeemed/roll-off the balance sheet.

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