Key events this week – ECB & BoC meetings, US non-farm payrolls & ISM surveys, Aus GDP Q1, Global S&P PMIs
Recap from last week
The US PCE inflation print for Apr was in line with expectations and most likely qualifies as ‘heading back in the right direction’. Overall, this is likely to be seen as progress, albeit slow, and the FOMC will still need to see further easing across successive reports to be confident that inflation is moving sustainably towards the 2% target. Core PCE inflation slowed to +0.2% over the month from +0.3% in Mar. The annual core PCE inflation rate eased slightly to +2.75% in Apr from +2.81% in Mar, still above the current median FOMC projection of +2.6% over 2024. The 3-month annualized core PCE rate is still running at +3.5% but did slow from +4.4% in Mar. Services ex-energy & housing inflation has been a measure often cited by the FOMC as a gauge of the direction of underlying inflation. This measure eased in Apr to +0.32% from +0.4% in Mar, while the annual rate increased from +3.4% to +3.5%. The monthly trimmed mean eased further in Apr to +0.23% from +0.27% in Mar – and this monthly rate is almost back in line with the slower pace of H2 2023. The annual trimmed mean continued to slow to +2.9% from +3% in Mar.
Other US data from last week led to a lower estimate for GDP growth in Q2 (albeit still at an elevated pace). By the end of the week, the Atlanta Fed GDPNow cast for Q2 had slowed to +2.7% from +3.5% at the start of the week. Lower-than-expected personal spending growth for Apr was a key contributor. The ‘resilient consumer’ narrative came further into question as the second reading for Q1 GDP growth was also revised lower than expected to +1.3% – due mostly to lower personal consumption expenditures.
Other CPI reports last week suggested firm inflation is persisting. The Euro Area prelim CPI for May came in higher across both headline and core measures. This week, the ECB is broadly expected to cut its benchmark interest rates by 25bps. The firmer inflation print, and improving growth outlook may keep guidance for follow-up rate cuts somewhat opaque.
The monthly Aus inflation print for Apr indicated that progress on disinflation stalled. This result is likely to keep inflation concerns elevated at the RBA. However, the latest minutes of the RBA meeting noted that “members judged that it remained reasonable to look through short-term variation in inflation to avoid excessive fine-tuning”. The Board is balancing the task of staying on a ‘credible path’ to the midpoint of the inflation target with maintaining employment growth.
Outlook for the week ahead
This week marks the beginning of several weeks of important central bank meetings. Recently, central bank guidance (among developed markets) has ranged from rates staying higher at these peaks (holding for longer) to rate cuts starting to come into view to calibrate with a lower inflation environment and to achieve a soft landing.
The first of these developed market central banks are expected to cut rates this week – and the focus will shift to the guidance and outlook for further easing. The BoC is expected to cut its policy rate this week by 25bps (possible). BoC guidance had noted that rates had peaked, and it was waiting for more progress on inflation. In recent months, slower inflation prints have been more favorable, while growth improved in Q1 to +0.4% (after stalling through the second half of 2023). The next update on the Canadian labour market for May will be at the end of the week – and the unemployment rate is expected to remain elevated at around 6.1%.
The ECB is broadly expected to cut its key policy rates by 25bps this week. The ECB has been more consistent in its signalling of a cut at this Jun meeting. As noted already, the firmer inflation reading in May, and a more positive growth environment could make guidance less clear on the path of follow-up rate cuts.
The FOMC meets next week – and it currently sits in the camp of staying on hold for longer. Inflation data from last week will not likely change that guidance. The US labor market data this week will be important for how the FOMC sees the path of policy – continued resilient labor conditions are likely to support the FOMC in staying on hold for longer. Non-farm payroll growth is expected to remain at the more moderate pace of +185k in May (from +175k in Apr). The unemployment rate is expected to be unchanged at 3.9%. Metrics of labor demand, such as Job Openings are expected to continue to ease with openings falling slightly to 8.35m in Apr.
Other US data this week includes the ISM surveys for May. These will be instructive in confirming the recent improvement in the S&P PMI surveys for May. Manufacturing conditions are expected to stay around the neutral level, while services are expected to shift back into slight expansion.
This is also the blackout period for Fed speeches ahead of the FOMC meeting next week.
Aus Q1 GDP growth is expected to be little changed at +0.2% over the quarter and to slow to +1.2% over the year (from +1.5% in Q4).
The broader global S&P PMI’s for May will be released this week.
This week, the US Treasury will auction and settle approx. $400bn in ST Bills, with a net paydown of approx. $17bn.
QT this week: Approx $2.4bn in ST Bills will mature on the Fed balance sheet and will be reinvested. The lower cap of $25bn for monthly Treasury redemptions comes into effect this month.
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
