by Kim | Jul 10, 2023
Key events this week – US CPI, RBNZ and BoC policy decisions, central bank speeches
Recap from last week
Global yields moved higher last week within the context of the FOMC Minutes and the decision to pause hikes, recent hawkish speeches, and a series of better-than-expected data on the US economy.
The FOMC minutes detailed the decision to pause hikes, which was based on allowing more time to assess the progress of tightening done to date. However, “some participants” favoured another 25bps increase noting a tight labour market and “few clear signs that inflation was on a path to return to the Committees 2% objective over time”. While the FOMC is continuing to slow the pace of hikes, economic activity has been more resilient than expected. “Almost all participants” noted that further tightening would be “appropriate”.
The important US labour market data was mixed. There was some sign of easing demand for workers as payroll growth continued to slow in Jun, plus revisions lower in the prior two months. Job openings were also lower in May (still elevated though). Other data reflected continued tightness in labour market conditions with the unemployment rate staying low for 16yrs+, and falling for the 25-54yr group. Average hourly earnings growth remained elevated and average weekly hours increased. Initial claims, a coincident view of labour market conditions, increased again and the underlying trend has been rising, albeit slowly. The trend in continuing claims (which lags by a week), is now more mixed between the seasonally adjusted (slowing) and non-seasonally adjusted (rising) series.
The PMIs continued to show manufacturing and services conditions diverging at the end of Q2. The US ISM manufacturing PMI for Jun was only lower (in this cycle) at the depths of pandemic lockdowns. The underlying detail suggests that more manufacturing firms shifted to reporting ‘no change’ in activity compared to the prior month across the five key measures. In other words, recording lacklustre conditions. The ISM services PMI showed more widespread improvement in demand, output/activity, and employment. The global S&P PMIs reflected a similar situation. The global manufacturing PMI shifted further into contraction, while global services momentum slowed, but continued to signal a moderate expansion.
Outlook for the week ahead
The main focus this week will be on the US CPI report for Jun. This CPI report may take on slightly more importance given the recent move higher in yields. The CPI report for May provided some favourable signs of easing inflation. This month, headline inflation is expected to ease further to +3%, while core inflation is expected to stay elevated at +5% (down from +5.3% in May). Monthly core inflation is expected to slow to +0.3% from +0.4% in May.
There will be a few US Fed speeches this week. Of note will be Governor Waller on the economic outlook for the US and Fed Vice Chair for Supervision Barr on bank capital. The Fed will also release the Beige Book this week, providing an update on regional economic conditions.
The RBNZ will meet this week and is expected to leave rates on hold at 5.5%. The BoC will also meet this week and, after the stronger employment growth last week, expectations for a 25bps hike have increased.
Other speeches include RBA Governor Lowe will this week on the Reserve Bank review and monetary policy. The BoE Governor Bailey will speak this week, and the BoE credit conditions report will also be released this week.
This week, the US Treasury will auction and settle approx. $477bn in ST Bills, raising approx. $72bn in new money. The US Treasury will also auction the 30-year Bond and the 3-year and 10-year Notes this week – all 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
by Kim | Jul 3, 2023
Key events this week – US non-farm payrolls, FOMC minutes, RBA rate decision, global PMIs
Recap from last week
The recent pulse of stronger-than-expected US data has cast doubt over the magnitude of the slow-down in the US economy. As recession expectations drift further out in the time horizon, central bankers reaffirm expectations for some further tightening.
The most notable data point last week was the final/third revision of US GDP for Q1. Growth was revised higher to +2% on stronger consumption expenditures, a smaller decline in fixed investment, and an improvement in net exports. Personal consumption expenditure was the largest contributor to growth – and the monthly breakdown shows that Jan was the standout month of growth during Q1. So far in Q2, growth in real monthly personal consumption expenditure has slowed but volumes have remained at a higher level. The latest Atlanta Fed GDPNow (updated 30 Jun) has US Q2 growth accelerating to +2.2%.
US housing continued to surprise with an especially large increase in new home sales for May (possibly revised over the next few months). Mortgage applications continued to rebound, increasing by +3% on the week. US durable goods orders for May showed stronger than expected growth across a range of industries making it difficult to align with recent weakness in manufacturing surveys. Finally, the recent rise in initial claims reversed in the latest week with claims coming back down to +239k.
Headline PCE inflation continued to moderate in May and is now within the range of the latest FOMC projections for the end of 2023. Core inflation is moderating more slowly. The disinflation in core goods prices seems to have stalled, while core services price growth slowed slightly. Underlying measures such as the trimmed mean and median (especially the median) remain elevated but are starting to show signs of moderation.
From Sintra, the message was that the major central banks ex-Japan, are staying hawkish with policy rates expected to rise further and remain higher. The persistence of inflation was a key theme of the panel discussion, as were tight labor markets. US Fed Chair Powell noted that it was surprising that inflation had been persistent “but the bottom line is that policy has not been restrictive enough for long enough”.
Outlook for the week ahead
With many central banks in data-dependence mode, inflation, labor markets, and growth data will remain important inputs. This week, US non-farm payrolls will be in focus and this will be the only labor market report before the next FOMC meeting. Non-farm payroll growth is expected to slow to +200k in Jun. Participation is expected to remain little changed at 62.2% while the unemployment rate is expected to be unchanged at 3.7%. Other US labor market indicators this week include the JOLTS report for May and the Challenger Job Cuts announcements for Jun. We will continue to watch initial claims (expecting +245k) and any flow through to changes in continuing claims.
The minutes of the latest FOMC meeting in Jun will be released. This should provide further insight into the decision by the FOMC to pause hiking while guiding expectations for possible further increases in the FFR. The FOMC remained concerned about the slow progress on core inflation.
The RBA will meet this week on monetary policy. There is some expectation for another hike to 4.35%, but it’s likely to be another ‘finely balanced’ decision. The monthly Aus inflation data (only a new series) was mixed last week. Headline inflation slowed more than expected, but the core/underlying inflation rates were unchanged in May, remaining at elevated levels. Retail sales growth in May was stronger than expected.
Finally, the full range of global PMIs for Jun will be released this week providing a broader view of global growth momentum. The prelim/flash Jun PMIs across the G4 economies had been somewhat disappointing.
This week, the US Treasury will auction and settle approx. $349bn in ST Bills, raising approx. $131bn in new money.
QT Jul: Approx $2.4bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $12.3bn 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
by Kim | Jun 26, 2023
Key events this week – Inflation; US PCE, CPI for the Euro Area, Tokyo, Aus, and Canada, ECB Forum on Central Banking – policy panel with Fed Chair Powell, BoE Governor Bailey, ECB President Lagarde, and BoJ Governor Ueda
Recap from last week
If there has been a theme from the recent round of central bank meetings it’s central banks signaling that they may not be done raising rates as they continue to address persistent inflation. Most central banks have raised rates to levels expected to be restrictive, but for many, inflation remains too high. This came into sharp focus last week as the Bank of England hiked rates by 50bps after another worse-than-expected inflation report. The BoE noted ‘more persistence in the inflation process, against the background of a tight labor market and continued resilience in demand’. UK inflation was higher than expected with headline CPI unchanged at +8.7% in May. The monthly rate slowed to +0.7% (but expecting +0.4%). UK Core CPI accelerated to +7.1% over the year, up from +6.8% in Apr – led by another acceleration in services inflation.
The RBA minutes noted that the decision to increase rates in Jun was another ‘finely balanced decision’. The minutes also noted that “the recent data suggested that inflation risks had shifted somewhat to the upside. Given this shift and the already drawn-out return of inflation to target, the Board judged that a further increase in interest rates was warranted”. The removal of forward guidance from the minutes was unusual.
Japan has been the exception during this hiking cycle (as well as China). The latest Japanese CPI showed a modest slowdown in headline inflation to +3.2% in May. Falls in fuel, light, and water charges were the main contributor to the slowdown. But core underlying inflation – ex-fresh food and energy continued to accelerate, reaching another high of +4.3%. The BoJ continues to reinforce its commitment to its YCC program and low rates. The latest BoJ Summary of Opinions showed mixed views on the expected persistence of current inflation.
The week ended on a low note with the flash PMIs showing a deterioration in private sector momentum in Jun. Services activity continued to offset weakening manufacturing activity, but even services output growth momentum slowed (less so in the US). Manufacturing PMIs and output indexes shifted into and/or remained in contraction across Japan, Aus, the US, the UK, and Europe (especially Germany). Services activity remained mostly positive, but momentum slowed.
Outlook for the week ahead
With most central banks in data-dependence mode, inflation, labor markets, and growth reports will remain important inputs. This week, inflation will be in focus.
US PCE inflation (US Fed preferred measure) is expected to remain around +4.4% for May. Core inflation is expected to remain little changed at +4.7%. The other important US data point will be initial claims. This has been elevated over the last three weeks around the +260k level but has shown little flow through yet to a rise in continuing claims. Initial claims are expected to stay elevated at +266k this week.
The prelim Eurozone headline CPI for Jun is expected to slow to +5.6%(from +6.1%) while core inflation is expected to increase to +5.5% (up from +5.3% in May). Germany, Italy, and France prelim CPI reports for Jun will all be out this week.
The Aus monthly CPI for May will be an important input for the RBA meeting next week given the continued “finely balanced” nature of recent hiking decisions. The headline CPI is expected to slow to +6.1% from +6.8%. CPI ex-volatile items (auto fuel and fruit & veg) is the measure of underlying inflation in this series and is currently running at +6.8%.
Canada’s headline CPI for May is expected to ease to +3.4% (from +4.4%) while core CPI is expected to remain elevated at +5.2% (from +5.7%). The last BoC meeting noted concerns over inflation becoming “stuck materially above 2%”.
Finally, Japan’s Tokyo CPI is expected to show more persistent inflation with headline CPI increasing to +3.8% and core (ex-fresh food and energy) increasing to +4.4%.
The ECB Forum on Central Banking runs this week 26-28 Jun. On the final day is a policy panel discussion featuring US Fed Chair Powell, ECB President Lagarde, BoE Governor Bailey, and BoJ Governor Ueda.
US Fed Chair Powell will also take part in a discussion at the Financial Stability Conference in Spain.
This week, the US Treasury will auction and settle approx. $522bn in ST Bills, Notes, Bonds, FRNs, and TIPS, raising approx. $198bn in new money.
QT Jun: Approx $11.8bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $39.1bn in ST Bills, Notes, and Bonds 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
by Kim | Jun 19, 2023
Key events this week – BoE policy meeting, Fed Chair Powell testimony, Fed Vice Chair nomination hearings, RBA Minutes, global flash PMI’s Jun
Recap from last week;
Monetary policy meetings spanned a broad spectrum of conditions last week.
The FOMC paused hikes with the FFR at 5-5.25%. The pause marks a shift in the cycle to slowing the pace of hikes as we get “closer to the destination”. Guidance retained a hawkish bias with another two hikes possible this year and Jul likely a ‘live’ meeting at this stage. A key theme from Chair Powell was that the FOMC is still not seeing the kind of progress it wants on core inflation. The core PCE inflation projection was revised higher to 3.9% by the end of the year (up from 3.6%) and is projected to moderate to 2.6% by the end of 2024. The latest US core CPI inflation for May still had a 5% handle across the 12mth and 6mth/3mth annualized rates. But the breadth of higher inflation may be narrowing. Other measures of core CPI showed a shift towards slower inflation over the more recent months.
The upward revision to US growth projections by the FOMC for the remainder of 2023 indicates a better outlook than expected back in Mar. Growth over the year is expected to slow (from current growth of +1.6%) to +1% (previously expected +0.4%) by year-end and unemployment is expected to increase to 4.1% by year end (previously 4.5%). So far, there are some further signs of loosening labor market conditions with another week of elevated initial jobless claims. US retail demand was stronger than expected in May, but annual retail growth remains flat in real terms. US factory output growth remained sluggish, and this was broadly in line with the weaker manufacturing conditions from the May surveys.
The ECB raised its policy rates with guidance that more hikes are still expected. Core inflation forecasts for 2023 were revised higher (from Mar) but are still expected to moderate through the remainder of the year. Growth forecasts were revised only slightly lower.
The BoJ kept policy unchanged, maintaining ultra-loose conditions. The BoJ expects inflation to ease over the coming months and notes that it is yet to achieve ‘sustainable’ inflation. After the meeting, there was some speculation that a policy ‘tweak’ could be made in Jul. The latest Japanese CPI for May will be released this week – with core CPI ex-food & energy expected to increase to +4.4% in May from +4.1% in Apr.
The PBoC cut a short-term lending rate, increasing expectations for cuts across other key policy rates and other stimulus measures to boost sluggish domestic conditions.
Aus and UK labor market data remained strong. Tight labor markets may keep pressure on wages while inflation remains high in both countries. By the end of the week, markets were pricing in another two rate hikes in Aus by the end of the year – despite signs of slowing growth.
Finally, NZ recorded its second quarterly GDP decline in a row (Q4 and Q1). The RBNZ recently called a pause to its hiking cycle.
Outlook for the week ahead
The focus will remain on central banks this week. The BoE will meet and is expected to raise rates by a further 25bps at this meeting. The latest UK CPI data for May will be released prior to the meeting and headline inflation is expected to slow only slightly to +8.5% over the year and by +0.4% over the month. The Swiss National Bank will also meet this week.
US Fed Chair Powell will give two days of testimony with the semi-annual monetary report. The Fed Vice Chair nomination hearings will take place – featuring Governors Jefferson and Cook. There will be multiple Fed speakers throughout the week including Governor Waller.
The RBA minutes of the Jun meeting will be released. Markets expected a pause at the last meeting, so it will be important to gauge the discussion around policy options and just how finely balanced this latest decision was.
In the US, key housing data for May will be important; including existing home sales (expecting 4.24m SAAR), building permits (expecting 1.435m), and housing starts (expecting 1.4m).
Finally, the flash S&P PMI’s for Jun will be released this week. These will provide some insight into shifts in growth momentum in the final month of Q2. So far, the key dynamic has been stronger services momentum helping to offset weaker/sluggish manufacturing activity.
This week, the US Treasury will auction and settle approx. $339bn in ST Bills, including a 42-Day Cash Management Bill (CMB), raising approx. $121bn in new money. The US Treasury will also auction the 5-year TIPS and 20-year Bond this week – both will settle on 30 Jun.
QT Jun: Approx $4.7bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $1.2bn 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
by Kim | Jun 12, 2023
Key events this week – Monetary policy decisions; FOMC, ECB, and the BoJ, US CPI & Retail Sales, Aus Employment, Euro Area CPI
Recap from last week
Both the RBA and BoC have restarted policy hikes, citing persistent inflation. The RBA hiked for the second month in a row after pausing in Apr. The statement reflected a renewed concern for upside inflation risk and inflation expectations becoming entrenched. A notable change in the statement was the removal of “medium-term inflation expectations remain well anchored”. The Board noted concerns globally over persistent services inflation, higher unit labor costs, and ‘subdued’ productivity growth. Guidance was clear; some further tightening may be required. Markets priced in another hike for later in the year. Aus growth eased in Q1 with GDP slowing to +0.2%. This week, the May labor market survey is expected to show employment increased by +15k and the unemployment rate remained at 3.7%.
The BoC also hiked after being on pause since Jan. The Governing Council noted an increase in the pace of inflation and stronger growth in consumption across ‘interest rate sensitive goods’ including a pickup in housing market activity. The hike reflects the view that ‘monetary policy was not sufficiently restrictive’ to bring inflation sustainably back to the 2% target. The Governing Council has kept the option open to assess the next move in rates. Last week, Canadian employment declined and there was a small uptick in the unemployment rate.
US data remained mixed. The uptick in initial claims to +261k was notable and something to monitor. The S&P PMIs continued to show a divergence between stronger services momentum and sluggish manufacturing activity in May. The S&P PMI report showed that services activity broadly accelerated this month – led by “the fastest increase in output in just over a year”, while the ISM services PMI has started to show some moderation in service sector growth. US consumer credit growth continued to rebound in Apr.
Outlook for the week ahead
This will be a big week of central bank policy decisions. The FOMC is broadly expected to keep its policy rate on hold at 5.25% (approx. 26% probability of an increase at the time of writing) while maintaining a hawkish bias. The FOMC will present an updated set of projections across inflation, growth, unemployment, and the FFR. The projections are likely to show an expectation for some further tightening and guidance may reinforce keeping optionality for further hikes. The FOMC will have the latest CPI report for May, which will be released this week. Headline US CPI is expected to ease to +4.2% over the year, while core inflation is expected to remain elevated at +5.1% over the year (+0.4% over the month in May). US retail sales are expected to show some further moderation in demand with growth slowing to 0% in May (from +0.4% in Apr).
The ECB is expected to hike its policy rate by 25bps. The forward guidance on rates will be important given that the growth outlook has weakened notably over the last two quarters and inflation may be starting to moderate. The May inflation report showed inflation still elevated, but easing to +6.1% led by a large fall in energy prices. Core inflation ex-energy is still running at +7% over the year.
The BoJ will also meet this week. While there is no signal or expectation of an impending change to policy settings, there is likely to be some risk from here that the BoJ will tinker with its YCC. The Japanese economy continued to rebound with growth accelerating to +0.7% in Q1 from +0.1% in Q4 – led by household consumption, private investment, and inventories. Core inflation remains elevated and above the 2% target suggesting some pass-through from stronger growth. This momentum continued into May with both manufacturing and services PMI’s rising further.
This week, the US Treasury will auction and settle approx. $452bn in ST Bills, including Cash Management Bills (CMBs), Notes, and Bonds, raising approx. $127bn in new money. With the debt limit now suspended (through to Jan 2025), the focus shifts to rebuilding the US Treasury TGA cash balance. Last week, the US Treasury announced details to rebuild the cash balance which included a focus on shorter-tenor securities through to 14 Jun and the introduction of a regular 6-Week CMB.
QT Jun: Approx $11.7bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $15.1bn in ST Bills, Notes, and Bonds 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
