Key events this week – US PCE inflation, Aus & Canada CPI
Recap from last week
US spending, housing, and output data for May pointed to solid growth continuing through Q2, providing important context for the policy outlook as the FOMC considers when rate cuts will come into view.
The Atlanta Fed GDP Nowcast for Q2 dipped slightly from +3.2% to +3%, with consumption and housing data offsetting gains in industrial production. US retail sales growth for May of +0.1% was slower than expectations for a modest +0.3% increase. The fall in gasoline sales of 2.2% (related to a fall in gasoline prices of 3.6% in May) was the main driver of slower growth. Apr was revised lower from 0% growth to a -0.2% decline. The overall lacklustre growth in real terms highlights the normalizing trend of retail sales over the last two years.
Housing data was weaker in May. Falls in single-family permits and starts, which had been more buoyant, are now contributing to the slowing trend. Home builder sentiment also weakened in Jun. Existing home sales continued to drift lower.
US production/output was a bright spot in May. Manufacturing output growth accelerated, and the stronger result was evident across both durable and non-durable goods output.
The US prelim PMIs for Jun pointed to a continued improvement in growth momentum through the end of Q2. US services and manufacturing sectors continued to expand in Jun, contrasting with declines in other G4 economies.
Central bank decisions continued to diverge last week. The RBA stayed on hold, citing concerns over persistent inflation and reinforcing the need to ‘remain vigilant to the upside risks to inflation’. The Jun quarterly CPI will be important in ‘giving a much more comprehensive view of what’s going on’. The case for a rate hike was considered at this meeting, but a hold was deemed the most appropriate policy course.
The BoE kept rates on hold but signalled that Aug could be live for consideration of a rate cut.
As part of the August forecast round, members of the Committee would consider all of the information available and how this affected the assessment that the risks from inflation persistence were receding. On that basis, the Committee would keep under review for how long Bank Rate should be maintained at its current level. Source; BoE Minutes
Deliberations showed that a growing number of MPC members considered that UK inflation was on a downward trajectory and, despite still elevated services inflation, the policy decision at this meeting had become ‘finely balanced’.
The SNB cut rates for the second time in this cycle.
Outlook for the week ahead
This week’s US inflation data will provide a crucial update for the FOMC’s policy outlook. While US growth remains solid and the labor market rebalances, the FOMC needs consistent evidence that inflation is sustainably moving towards the 2% target before it considers initiating the rate-cutting cycle.
This week, the FOMC preferred PCE inflation data for May will provide a further reading on the progress of disinflation.
US PCE inflation is expected to slow to +2.6% in May, from +2.7% in Apr. This would be in line with the latest FOMC projection for the median PCE inflation rate of +2.6% over 2024. The monthly headline rate is expected to slow to 0% in May from +0.3% in Apr.
Core PCE inflation is expected to slow to +2.6% in May from +2.8% in Apr – this would be below the projection of +2.8% for core PCE inflation over 2024. The monthly core PCE inflation rate is also expected to slow to +0.1% in May from +0.2% in Apr.
There will be further important US consumption, housing, and output data to update the view of Q2 growth.
Personal spending for May is expected to increase by +0.3%, up from +0.2% in Apr. Personal income is expected to increase by +0.4% in May, up from +0.3% in Apr.
New home sales are expected to increase slightly to 0.65m annualized in May, up from 0.634m in Apr. Pending home sales will provide a view of the pipeline of housing sales for May.
US Q2 GDP (third estimate) is expected to be confirmed at +1.3% annualized.
Durable goods orders are expected to increase by +0.3% in May after increasing by +0.6% in Apr.
We are monitoring initial jobless claims as the 4-week average continues to rise. Last week, the seasonally adjusted initial claims series remained elevated at +238k, and are expected to be +240k this week.
Finally, there will be a range of Fed speeches this week. Fed Governor Waller will provide opening remarks on Monday (not clear that he’ll talk about the economy or monetary policy), and Governor Cook will speak on the economic outlook at the Economic Club of NY on Tuesday.
The Aus monthly CPI series for May will be released this week and will be important given the concerns of persistent inflation. Headline inflation is expected to be +3.8% in May, up from +3.6% in Apr. RBA Governor Bullock noted that the monthly series is useful in providing an update on the momentum of inflation, but doesn’t yet provide the full picture of inflation.
The Canadian CPI for May is expected to continue easing. Headline inflation is expected to slow to +2.6% in May from +2.7% in Apr. The important trimmed mean is also expected to slow further to +2.8% in May, from +2.9% in Apr. The BoC started cutting rates at its meeting in Jun citing continued evidence that underlying inflation is easing, and policy no longer needs to be as restrictive.
This week, the US Treasury will auction and settle approx. $645bn in ST Bills, Notes, and Bonds, raising approx. $113bn in new money.
QT this week: Approx $10.5bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx. $16bn in Notes & Bonds will be redeemed and rolled 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
