by Kim | Aug 14, 2023
Key events this week – FOMC minutes, RBA minutes, and RBNZ policy meeting, US growth indicators; retail sales, housing construction, and industrial production, global CPIs; UK, Canada, Euro Area (final), and Japan
Recap from last week
Last week we continued to fill in more of the evolving picture of US growth, inflation, and labor market conditions leading up to the next FOMC meeting. US inflation in Jul (CPI) continued to ease amid tight labor market conditions, easing labor demand, and resilient growth. So far, the overall picture points to the likelihood of another pause at the Sep FOMC meeting.
Headline US CPI did accelerate slightly to +3.3% from +3.1% in Jun, but near-term measures show the inflation trend is easing. There was a further deceleration in core CPI – which provides a better signal of the overall direction of inflation. Core CPI increased by +4.7% in Jul versus +4.9% in Jun. Core goods inflation slowed to +0.9% over the year, as new and used car and truck prices declined. Core services prices continued to grow at +6.1%. The trimmed mean inflation slowed to +4.8% in Jul from +5% in Jun and the monthly change in trimmed mean inflation remains lower, around +0.2% (the avg of the last three months). This was overall a good inflation report for the Fed – the second in a row. Measures of core inflation are still elevated over the year, but slowing over the more recent periods. So far, continuing to go in the right direction.
Fed speak has been quiet over the last few weeks. Last week, NY Fed President Williams was signaling that maintaining a restrictive stance will be important, but if inflation is coming down, then it will be “natural to bring nominal interest rates down next year consistent with that, to keep the stance of monetary policy appropriate for an economy that’s growing, and for inflation moving to the 2 percent level.” This was in line with Fed Chair Powell’s last press conference comments – “if we see inflation coming down credibly, sustainably, then we don’t need to be at a restrictive level anymore, we can you know, we can move back to a neutral level and then below a neutral level at a certain point”. Both sets of comments note general caution around ensuring that inflation is coming down sustainably before a change in policy stance.
Data from China continued to disappoint. Weaker export and import growth reflected weaker global demand for goods and weaker domestic demand in China. Headline inflation declined by -0.3% over the year, while core inflation accelerated from +0.4% in Jun to +0.8% in Jul as the monthly core inflation rate increased to +0.5% – the fastest of the last twelve months. New loans in China were also a notable miss in the month – reflecting weaker domestic demand. Further data this week on retail sales, production, and investment.
Outlook for the week ahead
This week, we get US growth indicators on spending, housing construction, and production. US retail sales for Jul are expected to increase by +0.4% over the month, up from +0.2% in Jun. Housing data this week includes permits (expected to increase to 1.46m SAAR) and housing starts (expected to increase to 1.44m). Industrial production is expected to increase by +0.3% after falling by -0.5% in Jun. We will continue to watch initial claims, which came in slightly higher than expected last week at +248k. All of these data points should feed into a solid update of the Atlanta Fed GDPNowcast for US Q3 growth.
The FOMC minutes will be released this week. The FOMC hiked rates by 25bps at the last meeting. Minutes may reflect discussion around the inflation outlook and the need for data-dependent guidance. Fed speak looks to be minimal again this week, ahead of the Jackson Hole Symposium next week (24-26 Aug).
The RBA minutes will be released. The Board kept the cash rate on hold at 4.1% at this meeting. Previous minutes have revealed that decisions have been ‘finely balanced’, so it will be interesting to see how the rate hike debate has shifted. The Aus labor market survey for Jul will be released and net employment growth is expected to slow to +21k while the unemployment rate remains unchanged at 3.5%. The wage price index is expected to increase by +1% in Q2 from +0.8% in Q1. The increase in the minimum wage award came into effect from 1 Jul – strictly speaking in Q3.
The RBNZ is expected to keep policy rates on hold this week.
Finally, global inflation readings will be in focus throughout the week. Canada’s CPI is expected to increase by +2.7% in Jul (from +2.8%) with the trimmed mean slowing to +3.4%. UK CPI is also expected to slow to +6.8% in Jul from +7.9% in Jun, with core CPI staying around +6.8%. The final Euro area CPI for Jul is expected to confirm headline inflation at +5.3% and core inflation at +5.5%. Euro area services inflation had accelerated in the prelim release to +5.6% (and by +1.4% in the month). Finally, the Japanese National CPI is expected to slow to +2.5% in Jul with core CPI ex-fresh food slowing to +3.1%.
This week, the US Treasury will auction and settle approx. $482bn in ST Bills, Notes, and Bonds raising approx. $82bn in new money.
Aug QT: Approx $54bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested.
Approx $42.6bn in Notes and Bonds will mature on the Fed balance sheet 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
by Kim | Aug 7, 2023
Key events this week – US CPI
Recap from last week
Over the next two months, the ‘totality’ of US growth, inflation, and labor market data will be central in determining the next policy steps for the FOMC. The focus last week was on the US labor market and growth momentum going into Q3. The Jul data continued to reflect a slowdown in hiring while the labor market remained tight/resilient. This labor market theme has also been evident across other developed markets.
US non-farm payrolls growth came in as expected around +187k, but the prior two months were revised lower by approx. -50k in total. At the same time, labor market conditions remained tight. From the household survey, the number of employed persons continued to increase (an increase in part-time employment more than offset the fall in full-time employment) while participation was unchanged. This resulted in another fall in the unemployment rate to 3.5%. The avg hourly earnings growth remained at +0.4% over the month and at a still elevated +4.4% over the year – consistent with tighter conditions. The US JOLTS data for Jun also reflected the underlying theme; demand for labor continued to ease as the rate of hiring and openings fell, but layoffs and discharges also declined.
The US services and manufacturing PMIs for Jul reflected the somewhat slower pace of hiring from the non-farm payrolls report. US manufacturing activity, which has remained lacklustre for many months, at best didn’t deteriorate further in Jul, but stayed in mild contraction. Services activity continued to expand modestly, but the pace of growth slowed. Services firms reported more widespread increases in prices this month.
Central bank decisions last week remained cautious on the inflation outlook, noting tight labor markets, and opting for data-dependent guidance. The RBA kept rates on hold to allow more time to assess the impact of the rate increases to date. Some further tightening of monetary policy may be required, and will depend upon the data and “the evolving assessment of risks”. The ‘evolving assessment of risks’ was an addition to the statement this month. The RBA continued to note that inflation was too high, and that services-led inflation remained persistent.
The BoE increased rates by a further 25bps as expected. Inflation risks remained skewed to the upside. The Committee noted that if “there were to be evidence of more persistent [inflation] pressures, then further tightening of policy would be required”.
Global PMIs for Jul continued to reflect slower growth momentum. Services activity growth remained moderate but slowed again. Global manufacturing activity continued to contract and at a slightly faster pace in Jul. This was led by further falls in output and orders, especially in the Eurozone and China. It’s worth noting that the global future output index for manufacturing continued to show reasonably widespread and improving sentiment in the outlook.
Outlook for the week ahead
US CPI for Jul will be the key data release this week. This will be the first of two inflation reports before the next FOMC meeting and will feed into the broader picture of economic activity for the FOMC. US Fed Chair Powell noted that while the Jun CPI reading was good and welcomed, it was only one reading and not a definitive view that inflation is on a ‘sustainable path’ back to the 2% target.
This week, US headline CPI for Jul is expected to accelerate slightly, due to base effects, to +3.3% from +3.1% in Jun. Inflation is expected to increase by +0.2% over the month versus +0.2% in Jun. Core CPI is expected to stay elevated at +4.7% in Jul, down slightly from +4.8% in Jun. Core inflation is also expected to increase by +0.2% over the month versus +0.2% in Jun.
We will continue to watch initial US jobless claims, which had shifted lower recently. This week, claims are expected to increase slightly to +230k from +227k last week.
This week, the US Treasury will auction and settle approx. $398bn in ST Bills raising approx. $53bn in new money. The US Treasury will also auction the 3-year and 10-year Notes and the 30-year Bond this week – these will settle next week.
Aug QT: Approx $18.2bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested.
Also gaining much attention last week was the notably higher US borrowing requirements for Q3 and Q4. Details of the changes to the US Treasury net borrowing requirement for Q3 and Q4 are outlined in the briefing note attached.
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
by Kim | Jul 31, 2023
Key events this week – BoE & RBA monetary policy meetings, US non-farm payrolls, US ISM surveys, Euro area CPI prelim for Jul, global PMIs for Jul
Recap from last week
Both the FOMC and ECB hiked rates last week but provided limited forward guidance. Despite recent improvements in inflation, neither central bank is claiming a victory over inflation, and both emphasized a data-dependent approach to future decisions.
The FOMC raised the FFR by 25bps to 5.25-5.5%. US GDP growth was stronger than expected for Q2 at +2.4%, unemployment remains low, and inflation appears to be moving in the right direction. Chair Powell noted that the Jun CPI was “a bit better than expected” but remained cautious that inflation is on a sustainable path to 2% and that the “process of getting inflation down to 2% has a long way to go”. The Sep meeting may or may not be “live”, depending on the inter-meeting data which includes two payroll and two inflation reports. On this, Chair Powell noted that the assessment for another hike in Sep would be based on the “totality of the data” specifically, growth, labor market conditions, and inflation.
On the growth front last week, US durable goods orders for Jun surprised strongly to the upside led by higher non-defense aircraft orders. This was somewhat supported by the flash US PMIs at the start of the week hinting at stabilizing manufacturing activity. Services growth was moderate but still slowed. The Jul flash PMI commentary was surprisingly downbeat with ‘gloomier business confidence’ noted.
US inflation for Jun was lower than expected as the PCE price index confirmed the improvement in the Jun CPI. While there are some base-year effects, the more recent annualized views confirm that near-term inflation continues to ease. Core inflation readings remain higher/still elevated – and this will stay a focus for the FOMC. The Employment Cost Index also came in slightly lower than expected at +1% for Q2, with the annual rate slowing, but remaining elevated at +4.5%.
The ECB hiked policy rates by another 25bps reflecting the current assessment of the inflation outlook. Inflation has started to ease over recent months, but the Governing Council noted that underlying inflation remains high. This was balanced against a deteriorating outlook for Euro area growth. The ECB bank lending survey noted tighter lending conditions and weaker demand for credit across sectors. Looking forward, the flash Euro area PMIs for Jul indicated a further deterioration in manufacturing activity as service sector momentum continued to ease.
The BoJ announced its intention to ‘flexibly’ manage the 10yr JGB trading band. The +/- 0.5% is now a reference rate, and the yield cap has been moved to +1%. The BoJ continued to signal that the achievement of its 2% inflation target “has not yet come in sight”. While fiscal 2023 inflation forecasts were increased, the BoJ revised its core forecast inflation slightly lower for 2024.
Outlook for the week ahead
Over the next two months, the ‘totality’ of US growth, inflation, and labor market data will be central in determining the next policy steps for the FOMC. The focus this week will be on the US labor market and growth momentum going into Q3. The first of the two important payroll reports for the US will be released this week. Non-farm payroll growth is expected to ease further to +184k in Jul (from +209k last month). At the same time, the unemployment rate is expected to stay at a low of 3.6%. The JOLTS report will for Jun will provide a broader context for the balance between labor supply and demand, with job openings expected to fall further to 9.6m The US ISM surveys will provide a view of manufacturing and services growth momentum going into Q3. Finally, the US Federal Reserve senior loan officer opinion survey for the latest quarter will be released. Chair Powell has already hinted at further tightening in lending conditions and weaker loan demand.
The RBA will meet this week. Market pricing for another hike moved much lower last week but some forecasters expect another hike. Quarterly headline inflation came in lower than expected but still elevated at +6%. Underlying inflation remained elevated at +5.9% and services inflation accelerated slightly to +6.3%. In a speech in Jul, Governor Lowe noted many cross-currents affecting the inflation outlook, and the Board is expected to provide an assessment of the inflation risks. Retail sales in Jun fell notably by -0.8%. The effect of higher rates on household consumption has been an important barometer for the RBA.
The BoE will meet this week and is expected to hike rates by a further 25bps.
Inflation and growth data for the Euro area will be in focus this week. The prelim Euro area CPI for Jul is expected to slow to +5.3% over the year and to +0.3% over the month. Core inflation is also expected to slow slightly to +5.4%. The flash Euro area GDP growth for Q2 is expected to increase by +0.2%, up from -0.1% in Q1.
Finally, the full suite of global PMIs for Jul will be released this week. Back in Jun, the growth momentum across manufacturing and services had started to slow. The flash Jul PMIs for the G4 plus Aus showed a continued slowdown in the pace of services growth. There was a slight improvement in manufacturing activity, despite all five headline manufacturing PMIs remaining in contraction territory.
This week, the US Treasury will auction and settle approx. $522bn in ST Bills, Notes, FRNs, TIPS, and Bonds raising approx. $41bn in new money.
Aug QT: Approx $17.5bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $31.4bn in Notes, Bonds, and FRNs will mature and roll off the Fed balance sheet (on 31 Jul).
US Treasury financing estimates for Q3 will be released this week.
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
by Kim | Jul 24, 2023
Key events this week – FOMC, ECB, and BoJ decisions, US PCE inflation, ECI & Q2 GDP, Aus CPI, prelim PMI’s Jul
Recap from last week
US data last week continued to reflect resilient results and little change in recent trends amid the higher rates environment.
US consumer spending remained positive in both nominal and real terms in Jun. Retail sales in Jun increased by less than expected by +0.2%, but sales growth in May was revised higher to +0.5%. The overall trend in retail sales (both nominal and real) has been easing but remains elevated and above the pre-pandemic trend.
US housing data remained mostly positive – especially for construction. Homebuilder sentiment stabilized in Jul. Permits came in lower than expected for Jun but still posted growth over Q2. New housing starts came in lower than expected in Jun and the stronger May result was revised lower – but new housing starts were still higher overall for Q2. Existing home sales were lower than expected in Jun at 4.16m (SAAR) and are now only 4% above the low of 4.0m in Jan 2023.
US manufacturing has been weaker and another fall in manufacturing output for Jun (-0.3%) confirmed recent softer survey results. While durable goods output growth has been modest (+0.8% over the year), this has not been enough to offset weakness in non-durable goods output which fell by -0.6% in Jun and is down -1.4% over the year.
Initial claims (SA) fell to +228k and were unchanged in NSA terms. There was a notable increase in continuing claims (NSA) for the week ending 8 Jul but this could be an effect from the 4th of Jul holiday.
Global inflation data was mixed. UK inflation did ease by more than expected with the annual headline rate falling to +7.9%. The monthly rate remained elevated at +0.8%. Canadian headline CPI eased by more than expected to +2.8% but was the result of a base-year effect from higher gasoline prices. The important core BoC measures of the trimmed mean, median, and common CPI showed little improvement in Jun compared to May. Annual headline inflation in Japan was up slightly to +3.3% in Jun, but monthly growth stayed low at +0.1%. Japanese CPI ex fresh food & energy remains at a near-term high of +4.2% – but stalled in the month at 0%.
Outlook for the week ahead
This week will be a big week of central bank decisions, growth, and inflation data.
The FOMC is expected to increase the FFR by a further 25bps this week. At this stage, markets are not pricing in another hike for this year. The FOMC will likely reiterate data dependence in its guidance. It will be important to see how the FOMC might change the way it frames the recent improvement in the inflation results. US GDP for Q2 is expected to slow to +1.7% from +2% in Q1. The latest Atlanta Fed GDP Nowcast has GDP growth running at +2.4% annualized in Q2. The important US PCE inflation data will be out later in the week and core PCE is expected to slow to +4.2% while headline PCE inflation is expected to slow from +3.8% in May. The employment cost index will also be released this week providing some insight into the pace of wage increases over Q2. The ECI is expected to increase by +1.1% in Q2 from +1.2% in Q1.
The ECB is expected to increase its policy rates by another 25bps, with a further hike expected later this year. The BoJ is expected to keep rates unchanged. It was reported late last week that BoJ officials see “little urgent need” to address YCC settings but “expect to discuss the issue (here)”.
The Aus quarterly CPI for Q2 will be released this week. Headline inflation is expected to ease from +7% in Q1 to +6.2% in Q2 and the trimmed mean is expected to slow from +6.6% to +6%. This CPI report will be an important input into the RBA assessment of the inflation outlook for its meeting and rates decision next week.
Finally, the prelim PMIs for Jul will be released. This will provide a timely update on shifts in the growth momentum of manufacturing versus service sectors among the larger developed economies. Growth in services has been a key driver of global growth momentum helping to offset weaker manufacturing activity.
This week, the US Treasury will auction and settle approx. $522bn in ST Bills, Notes, FRNs, TIPS, and Bonds raising approx. $46bn in new money.
QT Jul: Approx $11.4bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $33.6bn in Notes, Bonds, FRNs, and ST Bills will mature and roll off the Fed balance sheet (incl 31 Jul).
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
by Kim | Jul 17, 2023
Key events this week – US retail sales & housing, RBA minutes, Aus labor market, CPI reports; UK, Canada, NZ, Japan, and Eurozone
Recap from last week
US inflation continued to ease in Jun. The headline inflation rate slowed to +3.1% from +4.1% in May. Core CPI eased by slightly more than expected to +4.9%. While the magnitude of the slowdown over the last two months has been aided by the higher base from a year ago, there has been a solid contribution to the deceleration from more recent developments in inflation. This includes lower energy prices and moderating food and shelter price growth. The more consistent measures of the underlying CPI trend – the trimmed mean and median CPI, have also slowed, including the recent annualized periods. But these measures still highlight that, accounting for outlier categories, inflation from the centre of the distribution (i.e. those product categories not deemed outliers) remains higher than other measures of core CPI.
Even after the better-than-expected report, Fed speeches remained cautious. Governor Waller noted that he would need to “see this improvement sustained before I am confident that inflation has decelerated”. Taking this CPI report into account, he still sees another two 25bps increases over the four remaining meetings this year (including a hike in Jul) while keeping policy restrictive “for some time” to reach the 2% inflation objective. Markets continue to price in a 25bp hike at the July meeting next week but have not priced in another hike after that. We are now in the blackout period ahead of the FOMC meeting next week – although there will be a speech by Vice Chair for Supervision Barr during the week.
The prelim University of Michigan consumer sentiment report for Jul posted a stronger rebound, citing a “continued slowdown in inflation along with stability in labor markets”. Yet, year-ahead inflation expectations increased slightly to +3.3%. Longer-run inflation expectations were unchanged at +3.1%. Sentiment around long and short-term business conditions improved notably this month. The Fed Beige Book survey for Jul noted that despite an improvement in economic activity since May, growth was expected to slow in the coming months.
The RBNZ kept rates on hold last week at 5.5% and noted that rates would likely remain restrictive for some time to ensure inflation returns to the 1-3% range. The BoC hiked rates by another 25bps to 5.0%. The BoC noted that the slowdown in inflation has been led by falling energy prices and ‘less from easing underlying inflation’.
RBA Governor Lowe outlined several changes to the operation of the Aussie central bank after an independent review. On the outlook, he noted that it remained to be determined whether monetary policy has more work to do and it’s still possible that more tightening will be required. At the end of the week, current Deputy Gov Michele Bullock was announced to replace Philip Lowe as the new RBA Governor.
Outlook for the week ahead
We continue to remain focused on growth and inflation indicators leading into the FOMC meeting next week. This week, US retail sales should provide a view on robust consumer spending in Jun with sales expected to increase by +0.5% (+0.3% in May). US housing data will also be in focus esp. building permits (expecting 1.5m SAAR) and housing starts (expecting 1.48m SAAR). Last month, housing starts jumped to 1.63m – and we’ll see the degree to which this is revised this month. Existing home sales are expected to moderate to 4.23m (from 4.3m). Initial claims are expected to increase slightly to +243k.
The RBA minutes are expected to outline in detail the decision to hold rates steady at the Jul meeting. In his speech last week, Governor Lowe noted that there will be a full review of performance, forecasts, and assessment of risks related to the inflation outlook at the Aug meeting – there may be some detail around this in the Jul minutes. The Aus labor market survey for Jun is expected to show a slowdown in net employment growth to +17k (from +76k in May). The unemployment rate is expected to stay at a low of 3.6%.
Finally, there will be several important global CPI reports this week. UK CPI is expected to moderate to +8.2% in Jun and +0.4% over the month. This will be an important report for the BoE after the surprise 50bps hike at the last meeting citing persistent inflation pressures. Canadian CPI is expected to moderate to +3% over the year. Core measures will be in focus for the BoC and are expected to remain around +3.7% ex-food & energy and +3.8% for the trimmed mean. The NZ CPI is expected to moderate to +5.9% at the end of Q2. Finally, the headline CPI for Japan is expected to accelerate slightly to +3.5% in Jun while underlying inflation ex fresh food and energy is expected to stay around +4.2%.
This week, the US Treasury will auction and settle approx. $439bn in ST Bills, Notes, and Bonds raising approx. $63bn in new money. The US Treasury will also auction the 10-Year TIPS and 20-Year Bond this week – both will settle next week.
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
