Key events this week – US non-farm payrolls, RBA & BoC meetings, GDP Q3; Aus, Japan and the Euro Area
Recap from last week
Progress on slowing US and Euro Area inflation has reignited optimism for a policy shift with markets pricing a larger number of rate cuts in 2024.
In the US, better-than-expected progress on PCE inflation, amid signs of easing growth momentum and some dovish central bank signaling, saw up to five rate cuts priced for 2024 and commencing as early as Q1. US PCE headline inflation eased more than expected to +3% over the year in Oct – which is now below the lower end of the current FOMC projections for the year (PCE inflation projection range is +3.1% to +3.8%). Core PCE inflation slowed as expected to +3.5% in Oct, with the monthly pace slowing to +0.2%. Measures of underlying inflation, such as core services ex shelter slowed more notably in Oct to +3.2% from +3.5% in Sept.
The speech from Fed Governor Waller garnered the most attention before the PCE inflation report. He was ‘increasingly confident’ that policy was tight enough (signaling not likely to see another hike). While “monetary policy has to work now to get inflation back to 2%”, he did outline a potential path for a Fed policy shift, as a means to align rates with slower inflation;
If the decline in inflation continues “for several more months … three months, four months, five months … we could start lowering the policy rate just because inflation is lower,” he said. “It has nothing to do with trying to save the economy. It is consistent with every policy rule. There is no reason to say we will keep it really high.” (Source: Reuters, 29 Nov 2023)
The FOMC will need to manage the risk that easing policy could slow the progress of bringing down inflation. For now, core inflation remains well above the 2% target and unemployment remains historically low. There are signs that growth is slowing from the robust pace of +4.9% in Q3 and the Atlanta Fed GDP Nowcast for Q4 did take a step down to 1.2% last week on slower personal spending growth, but it’s too early to call. Fed Chair Powell sought to address the enthusiasm for slowing inflation leading to a policy pivot;
“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.” US Fed Chair Powell, Opening Remarks, 1 Dec 2023
The prelim Euro Area CPI for Nov also slowed more than expected. Headline CPI slowed to +2.4% in Oct with the monthly pace falling by -0.5% led by falls in energy and services prices. Core CPI also slowed by more than expected to +3.6% (from +4.2% in Oct). The slowing inflation seems to be more consistent with stalling growth in the Euro Area.
The monthly Aus inflation indicator eased by more than expected with headline inflation slowing to +4.9%. The core trimmed mean measure slowed slightly to +5.3% suggesting that inflationary pressures in the center of the distribution remain broad. The tradable versus non-tradable view of inflation will likely reinforce the RBA governor’s view that inflation has become more domestically focused. Non-tradable inflation has eased from a peak of +7.7% in Jan 2023 to +6% in Oct.
Outlook for the week ahead
US labor market data will be the key focus this week. It will be an important and timely data release to help round out the view of the US economy as we look for signs of moderating demand and further easing of wage growth ahead of next week’s CPI for Nov and the FOMC meeting on 12-13 Dec.
US non-farm payrolls are expected to rebound to +180k in Nov after weaker growth in Oct of +150k (impacted by labor disputes). The unemployment rate is expected to stay unchanged at 3.9%. Average weekly earnings growth is expected to pick up slightly to +0.3% over the month but stay around 4% over the year. The Oct (lagging) JOLTS data is expected to show a continued slowing in labor demand with job openings easing to 9.4m.
The RBA will meet this week and is expected to keep policy rates unchanged at 4.35% after hiking by 25bps at the previous meeting. Since the last meeting, RBA Governor Bullock has noted that the nature of inflation in Aus has become “increasingly homegrown and demand-driven”, highlighting the role of monetary policy in addressing inflation. Later in the week, Aus Q3 GDP is expected to show that growth slowed to +0.3% over the quarter (from +0.4% in Q2) and slowed to +1.7% over the year.
The BoC will meet this week and is expected to keep policy rates unchanged at 5%. At the last meeting, the Governing Council noted concerns over persistent underlying inflation (with a special note on the war in Israel and Gaza as a new source of geopolitical uncertainty) – but since then headline and core measures of inflation have continued to ease. Last week, Q3 GDP declined by -0.3% (expecting growth to be flat) as exports declined and household consumption growth stalled.
The second release of Japanese Q3 GDP is expected to confirm the -0.5% contraction (from +1.2% in Q2). The fall in GDP was led by the change in inventories which offset a muted contribution from household consumption, private investment, and net export growth.
The second release of the Euro Area Q3 GDP is also expected to confirm growth stalling at -0.1% in Q3.
The remainder of the S&P Global Services PMI’s for Nov will be released this week.
The US Treasury will auction and settle approx. $429bn in ST Bills raising approx. $6bn in new money.
QT this week: Approx $3.7bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $3.1bn in ST Bills will mature and roll off (redeemed) the Fed 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
