Key events this week – Central banks; BoJ, BoC, and ECB, US PCE inflation, Prelim PMIs Jan
Recap from last week
As markets anticipate the start of the US rate-cutting cycle, US Fed Governor Waller provided important context and markers around the FOMC projections of (a median of) three rate cuts through 2024. He was clear on one thing; the FOMC will now likely have a more balanced focus between the dual mandates of 2% inflation and full employment as it moves to calibrate policy settings.
While the emphasis of policy since that time has been on pushing down inflation, given the strength of the current labor market the FOMC’s focus now is likely to be more balanced: keeping inflation on a 2 percent path while also keeping employment near its maximum level. Today, I view the risks to our employment and inflation mandates as being more closely balanced. Source: Governor Waller, Speech at The Brookings Institution
Labor demand has slowed through the tightening cycle via a lower vacancy rate (from a peak of 7.5% to 5.3% in Nov) while unemployment/involuntary separations have stayed low. According to Waller’s research, the US labor market is approaching a point where a lower vacancy rate could mean a notable increase in unemployment;
We showed in our research that if the vacancy rate continued to fall below 4.5 percent there would be a significant increase in the unemployment rate. So, from now on, the setting of policy needs to proceed with more caution to avoid over-tightening.
Waller noted that economic activity and the labor market ‘was in good shape’ and he was ‘more confident than since 2021’ that inflation was on the path to 2%. To keep the economy on this trajectory, the FOMC can consider lowering the policy rate “to keep the real policy rate at an appropriate level of tightness” without the need to “cut as rapidly as in the past”. Data dependence remained the important caveat. On the subject of timing, more information would be needed “in the coming months” to confirm that inflation is on a sustainable path to 2%. One important hurdle on that path is the Jan CPI revisions (9 Feb) – along with key labor market reports.
US data last week was in line with the recent shape of US growth trends – led by robust consumer spending and weakness in manufacturing. Consumer retail sales growth was higher than expected in Dec. Anecdotes in the Fed Beige Book also noted strong consumer holiday spending and increased leisure travel. Consumer sentiment moved higher at the start of Jan and initial claims fell below +200k.
Manufacturing activity stayed weaker. The NY Empire State Manufacturing survey for Jan showed widespread contraction in orders and the Beige Book noted that nearly all districts reported decreases in manufacturing activity. Within the industrial production report, manufacturing output in Dec was up +0.1% in Dec.
US housing data was mixed as mortgage rates continued to ease. Home builder sentiment increased by more than expected but the recovery was uneven across the regions. Mortgage applications continued to grow. Housing permits were higher, housing starts were lower, and completions rose notably into the end of 2023. Existing home sales fell in Dec to a new pandemic low.
Piecing this together, the advance release of US GDP this week is expected to show that growth slowed to +2% in Q4 from the very fast pace of +4.9% in Q3.
Outlook for the week ahead
The main focus this week will be US PCE inflation. This is the preferred measure of inflation for the FOMC and a further slowing of inflation will be important for sentiment around the timing of rate cuts. US PCE inflation for Dec is expected to be +2.6% (unchanged from Nov) over the year and +0.2% over the month. Core PCE inflation is expected to slow to +3% in Dec from +3.2% in Nov and increase to +0.2% over the month (from +0.1% in Nov). The FOMC projections for 2023 year-end PCE inflation are; +2.8% headline and +3.2% core. The FOMC meets next week.
There will be several central bank meetings this week. Settings are expected to be unchanged however central banks may start to adjust guidance as inflation eases. The Bank of Japan is expected to keep policy settings unchanged. Last week, the Japanese national CPI continued to improve as headline and core inflation rates slowed.
The Bank of Canada is expected to keep policy settings unchanged. At the prior meeting, the BoC noted that there had been clearer signs that monetary policy was helping to moderate spending and relieve price pressures. The increase in Canada’s headline CPI in Dec was partly the result of gasoline price base effects. The trimmed mean inflation rate increased to +3.7% from +3.5% in Nov suggesting some persistence in underlying inflation. The latest BoC Business Outlook Survey noted some softening in firm’s output price growth, however, wage growth was ‘expected to ease only gradually’.
The ECB is also expected to keep policy settings unchanged at this meeting. At the last meeting, the ECB noted that inflation had eased, but that domestic price pressures remain elevated. The Euro area CPI for Dec was confirmed at +2.9% – higher than in Nov but a ‘temporary’ increase was expected at the last ECB meeting. Underlying inflation continued to ease, and slowed to +3.4% in Dec.
Finally, the prelim S&P PMIs for Jan will be released this week providing some insight into growth momentum at the start of 2024.
This week, the US Treasury will auction and settle approx. $496bn in ST Bills raising approx. $49bn in new money. The US Treasury will also auction the 7-Year, 5-Year, and 2-Year Notes and the 2-Year FRN this week – to settle at the end of the month (next week).
QT this week: Approx $12.2bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $2bn in ST Bills will mature and roll off 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
