by Kim | Mar 27, 2023
Key events this week – Inflation; US, Europe, and Australia, US Fed speak, China PMIs
Recap from last week
The recent turmoil in the banking sector did not stop central banks from raising rates again last week.
The FOMC increased the FFR by another 25bps last week to 4.75-5%. The FOMC made several changes to the statement, emphasizing that the US banking system is ‘sound and resilient’. The main theme is the effect of bank failures is expected to result in tighter credit conditions for businesses and households with a high degree of uncertainty about these effects. FOMC guidance changed to “anticipates that some additional policy firming may be appropriate” which means that potentially tighter credit conditions may be enough to help slow inflation without further tightening from the Fed. The summary of projections for the path of rates was little changed from Dec (the median was unchanged at 5.1%) – with rates projected to stay high this year (cuts weren’t the “base case” this year).
There is now a large discrepancy between where market pricing and the FOMC see the path of the FFR for this year. Market pricing (as of 27 Mar) has shifted to a pause in May and June and cuts in the FFR after that. The economic projections imply further growth weakness through 2023 – reflected in an increase in unemployment by the end of the year (this projection was mostly unchanged from Dec). We are yet to see a turn in the data. For example, US initial claims remained very low last week at +191k.
The BoE hiked rates by 25bps last week. Inflation increased unexpectedly in Feb, but ‘remains likely to fall sharply’ over the rest of this year. The BoE noted that ‘uncertainties around the financial and economic outlook have risen’.
The SNB also increased rates by 50bps to 1.50%.
The RBA minutes noted somewhat weaker domestic conditions in Q4, and that sluggish growth may have continued into Mar. The softer Jan labor market report played into this growth concern (but the stronger Feb labor market report reversed that weakness). The RBA expects that inflation peaked in Q4 2022 and the Board agreed to ‘reconsider’ the case for a pause at the following meeting (next week).
The prelim PMIs for Mar were encouraging. Across the G4, stronger growth momentum across services helped to offset stalled momentum in manufacturing. There was a notable acceleration in services momentum, especially in Europe (France & Germany) and the US. Headline manufacturing momentum remained weaker but there were some small signs of renewed output growth. In Australia, momentum across services and manufacturing slipped into contraction.
Outlook for the week ahead
More inflation data is out this week. US PCE inflation is expected to increase by +0.2% over the month and by +5.3% over the year to Feb. Core inflation is expected to remain little changed at +4.7% over the year.
Euro Area prelim CPI for Mar is expected to increase by +7.2% over the year from +8.5% as higher energy prices in the base month will see the headline rate fall. But core CPI inflation is expected to increase to +5.7% in Mar.
The monthly Aus CPI (a new series) is expected to slow to +7.1% in Feb (from +7.4%). Aus retail sales are expected to increase by +0.4% in Feb after the stronger +1.9% increase in Jan. Both reports will be important inputs for the RBA next week.
Fed (central bank) speak is back this week with several speeches on the economic outlook and monetary policy. There will also be two days of testimony from Vice Chair Barr on bank oversight.
A big week in US Treasury issuance to round out month and quarter end – including the addition of two CMB’s. This week, the US Treasury will auction and settle approx. $495bn in ST Bills, CMBs, Notes, Bonds, FRNs, and TIPS, raising approx. $133bn in new money. This brings the estimated net new money raised for the quarter to $657bn (Treasury forecast; $932bn).
QT: Approx $50bn in ST Bills, Notes, and Bonds will mature and roll off the Fed balance sheet this week. Approx $14.5bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested.
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 | Mar 20, 2023
Key events this week – FOMC, BoE, and SNB monetary policy decisions, RBA minutes, prelim global PMIs for March
Recap from last week
Markets remained on tenterhooks last week, processing the fallout from bank failures. Global central bankers worked to contain contagion risk and ensure the smooth functioning of markets. This included the SNB stepping in to broker the sale of the beleaguered Credit Suisse. Global central banks later announced a coordinated response to “enhance the provision of USD liquidity” (announcement).
Last week, the ECB raised rates by 50bps as it previously signaled it would do. The policy decision acknowledged the context of an ‘elevated level of uncertainty’ and reiterated the importance of data dependence going forward (halting forward guidance). The ECB signaled it would address both price and financial stability, noting “the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy”. This decision sets the stage for the FOMC this week.
Markets are broadly expecting the FOMC to hike by 25bps as US CPI for Feb showed underlying inflation remained persistent. But some consider that a pause by the FOMC is not out of the question amid financial stability risks. Beyond this meeting, the uncertainty for the path of rates and economic projections has increased substantially and the FOMC is likely to acknowledge the high degree of uncertainty around its quarterly forecast update (SEPs). The summary of projections for rates will show any shift by the FOMC from its ‘higher for longer’ outlook on rates.
US data last week was mixed. US headline inflation continued to ease as energy and used car prices fell. This helped to offset the effect of accelerating shelter price inflation. The trends in underlying core and ‘super core’ measures showed that inflation momentum remained persistent.
As expected, US retail sales fell slightly in Feb after the much stronger growth in Jan. In real terms, retail sales growth continues to stall but the level remains above the pre-pandemic trajectory.
The first two US regional manufacturing surveys for Mar disappointed as activity continued to slow amid weakening orders. This month, stalling growth in employment and hours became more widespread. Employment declines are not yet at a point where they are widespread but it has begun to increase.
US housing indicators were again solid. Mortgage applications increased for a second week, housing starts and permits in Feb increased more than expected, and the NAHB homebuilder sentiment index increased again in Mar. It’s unclear whether this is a turning point for housing construction but at the very least, the fall seems to have slowed for now.
Outlook for the week ahead
It is likely to be another turbulent week with markets on edge. The main events this week will be the FOMC, BoE, and SNB policy meetings. The BoE is expected to increase rates by 25bps. The Feb UK CPI is out before the meeting and inflation is expected to remain elevated at +9.8%. The SNB was expected to increase rates at this meeting by 25bps.
The RBA minutes will be released this week. This should provide some background to the shift in guidance at the last meeting.
Finally, the Mar prelim S&P PMIs for the larger G4 economies will be released. Momentum is expected to be little changed across the manufacturing and services sectors of these economies.
This week, the US Treasury will auction and settle approx. $285bn in ST Bills, with a paydown of $13bn.
The US Treasury will auction the 20-year Bond and 10-year TIPS this week – both will settle next week.
QT: Approx $0.55bn in ST Bills will mature and roll off the Fed balance sheet this week. Approx $7.4bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested.
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 | Mar 13, 2023
Key events this week – US CPI and retail sales, ECB decision, China data, and Aus labor market
A turbulent week of shifting US monetary policy signaling was capped off by the seemingly rapid collapse of two US banks. Over the weekend, the US Federal Reserve, US Treasury, and the FDIC announced a comprehensive backstop for depositors of the failed banks, and for depositors in the US financial system more broadly, to avoid wider potential funding issues.
Earlier in the week, US Fed Chair Powell’s testimony surprised markets by signaling a willingness to reconsider an increase in the pace of hikes, “if the totality of data were to indicate that faster tightening is warranted”. After the CPI revisions in Jan, the FOMC became concerned that they had not made as much progress on inflation as they had thought.
Since that testimony, broader concern over the financial system has created a greater level of uncertainty for the path of rates. After a round trip during the week, markets are back to pricing a +25bps increase (at the time of writing), and a small probability that the FOMC may pause hikes next week. In this context, the US CPI report on Tuesday is likely even more important to the FOMC and how it may need to address both financial stability and inflation concerns. In light of this heightened uncertainty, there is a risk that the FOMC provides some policy signaling during the blackout period, should there be a need to shift market expectations ahead of the meeting on 21-22 Mar. Despite the blackout period, there is a speech by Board of Governors member Bowman scheduled on Tuesday in Hawaii after the CPI report.
Recap from other events last week
Growth in US payrolls slowed in Feb but remained elevated even after the larger increase in Jan. The trend in slower payroll growth has seemed to stabilize over the last few months. Overall, the US labor market remains strong. Since Nov 22 there has been a further improvement in the participation rate (LFPR) and in Feb, the LFPR for the core working age group reached its pre-pandemic level for the first time in this recovery. While the unemployment rate ticked up in Feb, the demand for labor has mostly absorbed the increase in supply over the last few months. Hours growth remained stalled in Feb while manufacturing overtime hours continued to fall. The average hourly earnings ex-bonus accelerated to +4.6% over the year, while slowing slightly over the month to +0.2%.
US initial claims increased to over +200k last week and this may be something to watch. While the increase in initial claims was concentrated in New York for wk ending 4 Mar, there was a corresponding increase in continuing claims for wk ending 25 Feb – and this data lags initial claims by a week.
The RBA increased rates by a further 25bps to 3.60% and signaled in a speech later that “we are closer to the point where it will be appropriate to pause” and assess the cumulative impact of increases. The RBA cited peaking inflation and shifted its reference to a slowdown in household spending. This week, the Aus labor market report for Feb is expected to remain strong with a +48k increase in employment and a further tick lower in the unemployment rate to 3.6%.
Outlook for the week ahead
It’s still a big week of important US data, including the Feb CPI and retail sales. US CPI for Feb is expected to increase by +0.4% over the month in Feb (from +0.5% in Jan) and by +6% over the year (from +6.4% in Jan). Core inflation is expected to be unchanged at +0.4% over the month and slowing slightly to +5.5% over the year. Other US pricing data out this week includes the PPI and export/import price indexes for Feb.
US retail sales are expected to slow by -0.3% in Feb after a stronger increase of +3% in Jan.
US manufacturing and output data will include the first round of regional Fed manufacturing surveys for Mar. US industrial production for Feb is expected to increase by +0.4% in Feb after no growth in Jan.
The ECB meets on monetary policy this week. The Governing Council has previously signaled a +50bps increase is to be expected at this meeting. Eurozone inflation remains elevated and core inflation continues to increase. The final revision of Q4 GDP released last week showed a slight contraction in GDP for the Eurozone by -0.1%. Falls in consumption and private investment in Q4 were somewhat offset by a larger contribution from net exports (falling imports). This may affect ECB guidance. The ECB has also started QT this Mar and is expected to continue through to Jun at the initial lower rate.
Data out of China for Jan-Feb will be released providing some insight into the rebound in investment, production, and retail sales.
Finally, the BoJ will release the minutes of the last meeting for Governor Kuroda.
This week, the US Treasury will auction and settle approx. $351bn in ST Bills, Notes, and Bonds, raising approx. $46.1bn in new money.
QT: Approx $8bn in ST Bills, Notes, and Bonds will mature and roll off the Fed balance sheet this week. Approx $10.5bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested.
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 | Mar 6, 2023
Key events this week – US non-farm payrolls, US Fed Chair Powell testimony, central bank decisions; RBA, BoC, and BoJ
Recap from last week
The global S&P PMIs provided a broad reading of momentum for Feb.
The global composite output PMI recorded a further acceleration in output growth – the highest reading since Jul 2022. This improvement in momentum was led by a further expansion in the global services output index. The global manufacturing output PMI also showed an improvement in momentum, albeit smaller than for services, reaching a neutral 50 level. Manufacturing performance was still mixed despite the headline improvement. Conditions worsened across larger manufacturing countries; France, Japan, and Germany.
In the US, the question has been how much of the stronger momentum in Jan will be sustained. So far, the Feb ISM PMIs indicated no change to the momentum recorded in Jan. The ISM services PMI showed continued moderate expansion as domestic and export orders rebounded. Services inflation remained sticky. The ISM manufacturing PMI remained in a mild contraction. Production contracted further as weak orders were not offset by another fall in backlogs. Price increases became more widespread again.
US Fed Governor Waller’s speech suggested that the Jan revisions to the CPI showed that the FOMC may not have made as much progress on inflation as expected. Waller’s comments provide a guide; if payrolls and inflation data go back to the pre-Jan downward trajectory, then this endorses the current (Dec) SEP for the FFR of between 5.1-5.4%. If data comes in higher/hotter, then the projection for the target range may need to be increased.
Euro area CPI came in higher than expected for Feb at +8.5%, with the monthly pace increasing by +0.8%. Core CPI for Feb was also higher at +5.6%, up from +5.3% in Jan. The monthly core CPI also came in at +0.8%.
Outlook for the week ahead
The first of the important US Feb data will be released this week, leading up to the FOMC meeting on 21-22 Mar.
Growth in US payrolls is expected to slow to +210k in Feb (from +517k last month). The unemployment rate is expected to remain at a low of 3.4%. Other labor market indicators include JOLTS for Jan and the Challenger report for Feb.
US Fed Chair Powell will provide two days of testimony this week (the semi-annual report to Congress). He may mirror some of what Waller has said – that rate projections may need to move higher if data continues to strengthen.
The RBA is expected to increase rates by a further 25bps to 3.60%. Aus growth slowed by more than expected in Q4 with weakness in domestic consumption and investment. The headline monthly inflation (new series) for Jan eased to +7.2%. Retail sales growth was stronger for Jan but remained in a slower growth trend.
The BoC is expected to keep rates on hold, with the policy rate at 4.5%.
The BoJ will meet this week and policy settings are expected to be unchanged, as this will be Governor Kuroda’s last meeting.
This week, the US Treasury will auction and settle approx. $276bn in ST Bills with a net paydown of -$33bn. The US Treasury will also auction the 3 and 10-year Notes and the 30-year Bond this week – all will settle next week.
QT: Approx $0.8bn in ST Bills will mature and roll off the Fed balance sheet this week. Approx $10.4bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested.
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 | Feb 27, 2023
Key events this week – US ISM PMIs, global S&P PMIs, Eurozone prelim CPI, Aus; monthly CPI, retail sales, & GDP Q4
Recap from last week
US data mostly confirmed a firming of near-term economic momentum in Jan with a view that this momentum may extend beyond Jan. Rates markets were expecting a slowdown in activity which has yet to materialize more broadly. Current US FFR probabilities are now more in line with the December FOMC ‘dots’, with the FFR peaking around 5.25-5.5% and no cuts for 2023. So far, long rates have remained below last year’s peak.
But there is a large question over how much of the stronger momentum in US consumption and employment data for Jan was due to ‘seasonal factors’. So, it’s the US Feb data in the following two weeks that may provide important confirmation; payrolls (10 Mar), CPI (14 Mar), and retail sales (15 Mar), all leading up to the FOMC on 21-22 Mar. The Feb US CPI and retail sales reports will be released in the blackout period before the FOMC meeting.
US PCE inflation data for Jan was stronger than expected and broadly showed that progress on disinflation had stalled. The monthly and quarterly pace of inflation increased across the headline, core, super-core, median, and trimmed mean inflation numbers. The quarterly trends show that inflation remains sticky. The FOMC will be disappointed but not surprised. The FOMC minutes were clear that “the historical record cautions strongly against prematurely loosening policy” and that “substantially more evidence of progress across a broader range of prices would be required” before declaring inflation was on a ‘sustained downward path’.
Stronger US income growth in Jan supported higher consumption growth and a further increase in the saving rate. US initial claims remained low and below 200k. But weekly mortgage applications fell hard as mortgage rates increased. Regional manufacturing themes remained focused on the weakness in demand, difficulty finding skilled labor, and inflation.
The Feb prelim PMIs were important, indicating an improvement in growth momentum especially across services and manufacturing output. The contraction in US manufacturing output eased, indicating some positive momentum. US services shifted back to expansion in Feb. Overall, manufacturing output shifted back into growth across the Eurozone and the UK but remained weaker in Japan. Services output improved to a more moderate pace of expansion across the G4.
The RBA minutes reflected a shift away from considering a pause in rate hikes – only a 25 or 50bps increase was debated. The guidance appears to be preparing markets for at least another 40bps increase in hikes – and that may be why the “not on a pre-set path” statement was removed last month. This week, Aus monthly CPI is expected to slow to +8.1% in Jan, retail sales growth is expected to rebound by +1.2% in Jan, and GDP in Q4 is expected to increase by +0.9% (QoQ).
Outlook for the week ahead
US survey data for Feb will be a guide for growth momentum in the lead-up to the next few weeks of key Feb data. The US ISM PMIs for Feb are expected to show continued expansion in services, while the softness in manufacturing is likely to persist. There will be several other Feb regional manufacturing surveys released. Initial claims are expected to stay low at +197k. There will be several Fed speeches including Governor Waller on the economic outlook.
Europe; The prelim Eurozone CPI for Feb is expected to ease to +8.2% in Feb. The ECB minutes will be released this week.
Global PMI’s for Feb will provide a broader view of any change in growth momentum.
This week, the US Treasury will auction and settle approx. $438bn in ST Bills, Notes, and Bonds, raising approx. $70.8bn in new money.
QT: Approx $29bn in Notes, Bonds, and ST Bills will mature and roll off the Fed balance sheet this week. Approx $47bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested.
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
