Key events this week – US PCE inflation & Q3 GDP, Fed speeches, ECB & BoC monetary policy meetings, Aus CPI, Prelim PMIs Oct
Recap from last week
Fed speeches last week acknowledged that US economic activity had picked up through Q3 – including spending and payrolls growth. Recent inflation prints remain on a downward trend, but were “less encouraging”. Moderating wage growth was a stronger theme from the speeches, with wage growth “moving closer to levels that would be consistent with 2% inflation”. However, the central question was whether economic growth would moderate from here given the recent “significant tightening of financial conditions” resulting from higher long-term bond yields. The FOMC stance is unlikely to change from “proceeding carefully” with policy rates staying on hold. Speeches by Fed Chair Powell and Governor Waller suggested that there may be a higher bar for another rate hike, but that another hike was not off the table. More specifically, if growth stays strong AND, even if CPI just stabilizes here, then that could form the basis for more tightening by the FOMC.
In line with recent stronger economic data, US retail sales increased by more than expected while the prior month was revised higher. This lifted the trend of nominal and real retail sales growth through Q3 compared to Q2. US housing data was more downbeat than in recent months, amid rising mortgage rates. New mortgage applications in the prior week fell by -6.9%. New residential construction data recorded a fall in new permits in Sep (across all regions), while housing starts increased modestly compared to the sharper fall in Aug. Existing home sales in Sep fell to a new pandemic-era low of 3.96m units (SAAR-basis). Home builder sentiment in Oct continued to weaken with the headline index falling 9% to 40 – still above the pandemic low of 30. Industrial output growth was stronger than expected in Sep (although Aug was revised lower) and manufacturing output growth improved across both durable and non-durable goods industries.
Outlook for the week ahead
There will be several areas of focus this week. The first will be on US inflation and economic growth to further round out the view of the ‘totality of the data’ leading up to the FOMC meeting next week.
US PCE inflation for Sep is expected to ease slightly to +3.4% (from +3.5% in Aug). Core inflation is expected to slow to +3.7% in Sep (from +3.9% in Aug), with the monthly pace rising slightly to +0.3%. Core PCE at +3.7% would be in line with the current FOMC median projection for the year-end result. The prelim University of Michigan consumer sentiment survey for Oct noted some upward movement in one-year and five-year inflation expectations. The final survey result for Oct this week will show whether the change in inflation expectations has been revised.
The first look at US GDP growth for Q3 may be more important than usual given how much focus has been placed on the ‘resilient’ economic conditions. GDP in Q3 is expected to accelerate to +4.1% (SAAR) from +2.1% in Q2.
There will be several Fed speeches this week – unusual in the week before an FOMC meeting. All speeches are noted as ‘opening remarks’ in the Federal Reserve Calendar. Remarks have been scheduled for Fed Chair Powell, Governor Waller, and Fed Vice Chair for Supervision Barr.
This is the first of several weeks of central bank meetings. This week, the ECB and BoC will meet and both are expected to keep policy rates on hold.
The Aus Q3 CPI will be released. The RBA minutes and speeches over the last two weeks suggest that the Q3 CPI report could be important for the next RBA meeting (7 Nov). Aus headline CPI is expected to slow over the year to +5.3% from 6% in Q2 while the quarterly growth is expected to increase to +1.1% from +0.8% in Q2. Trimmed mean inflation is expected to stay elevated at +1.1% over the quarter and to slow to +5% over the year (from +5.9% in Q2). Over the last week, there was a modest lift in market expectations for another hike by the RBA. However, the Sep labor market survey was lacklustre – possibly confirming the RBA view that the labor market has ‘turned a corner’. The RBA Governor Michele Bullock and Assistant Governor Kent will appear before the Aus Senate Economics Committee after the CPI report, providing some opportunity to signal any potential change in policy outlook if appropriate.
Finally, the global flash PMIs for key G4 economies for Oct will be released this week. This will provide the first view of growth momentum across manufacturing and services leading into Q4.
Geopolitical risk and uncertainty remain elevated this week.
The US House of Representatives is yet to appoint a new speaker. The process of nominating a new speaker will continue this week.
This week, the US Treasury will auction and settle approx. $454bn in ST Bills raising approx. $40bn in new money. The US Treasury will also auction approx. $167bn in 2-Year, 5-Year, 7-Year, and 2-Year FRNs – which will settle on 31 Oct.
QT this week: Approx $10.5bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $1.6bn in ST Bills 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
