by Kim | Sep 26, 2022
Key events for the week ahead – Central bank speeches including Fed Chair Powell, Eurozone CPI, and US PCE inflation
Recap from last week
Markets are continuing to digest the details of last week’s monetary policy decisions.
High, and seemingly persistent, inflation is keeping the FOMC on its unwavering hawkish path. The FOMC increased rates by +75bps as expected. The SEP shows rates higher for longer, with no cuts projected until 2024. The FOMC view of restrictive policy is where real yields are positive across the yield curve (using core PCE measures). The market reaction so far has been a shift up in the yield curve, further inversion, and pricing another 75bp hike for Nov.
The BoE raised by 50bps as expected with the decision to sell bonds from its Asset Purchase Facility. The rate hike decision was not unanimous. Three members voted for a 75bps increase citing that the energy price guarantee and fiscal support would add to demand pressure. This was a prescient outlook in light of the budget released at the end of the week. The proposed spending amid high inflation and monetary tightening has added greater pressure to rates and markets are currently pricing additional hikes before the next meeting (Source: Bloomberg). Eyes on the BoE this week.
Despite rising inflation, the BoJ kept policy settings unchanged, and markets are questioning how long the BoJ can remain an outlier. After weeks of currency weakening, and signaling an intervention, the government intervened to strengthen the Yen after the BoJ kept policy unchanged. The rates differential is still a fundamental issue that is reflected in currency weakness.
The RBA minutes for Sep highlighted that the Board was already starting to consider slowing the pace of hikes. When this was detailed several days after the Sep Board meeting, the implied cash rate futures terminal rate fell to 3.55% (Jul 2023) from 3.76%. But as of 26 Sep, the cash rate futures are now pricing a peak of 4.325% (source: ASX). The RBA meets next week, and it will be important how it responds to market expectations of higher rates (even another 100bps priced by year-end) and how this aligns with slowing the pace of hikes to keep an even keel.
Global prelim PMIS for Sep were mixed. Manufacturing output contracted except in Aus while services activity weakened except in Japan. Input cost increases were more widespread in Europe, especially in Germany.
Outlook for the week ahead
There will be a notable number of central bank speeches this week, including US Fed Chair Powell and ECB President Lagarde.
Inflation data will be in focus, especially in Europe. The Eurozone headline CPI is expected to increase to +9.6% in Sep (from +9.1% in Aug). Country-level CPIs will also be released.
US PCE inflation for Aug is expected to increase to +6.6% from +6.3% in Jul. The monthly pace is expected to increase to +0.3% from -0.1% in Jul. The University of Michigan consumer sentiment for Sep is expected to be unchanged. Durable goods orders for Aug are expected to decline by -0.5% (versus Jul -0.1%).
This week, the US Treasury will auction and settle approx. $393bn in ST Bills, Notes, Bonds, TIPS, and FRN’s, raising approx. $73bn in new money.
This week also marks the first large redemption as a part of this QT program. In total, approx. $55.6bn of ST bills, Notes and Bonds will mature on the Fed balance sheet this week. Of this total;
- Approx. $33.9bn in Notes & Bonds maturing will be redeemed/roll-off the balance sheet on 30 Sep.
- Approx. $21.7bn in ST Bills will mature on the Fed balance sheet this week. Of this, approx. $4.3bn of maturing Bills will be redeemed and the remaining $17.4bn of maturing Bills 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 | Sep 19, 2022
Key events for the week ahead – FOMC, BoE, BoJ, and SNB policy decisions, CPI’s, central bank speeches, prelim PMIs for Sep
Recap from last week;
US inflation remains persistent. Headline US CPI increased by +8.2% in Aug (expecting +8.1%) after increasing by +8.5% in Jul. The main contributor to the deceleration between Jul and Aug was the fall in energy commodity prices (gasoline). All other main expenditure groups (food, energy services, core commodities, and core services) partly offset the decline in gasoline prices.
Measures of core CPI showed persistent inflation. The trimmed mean and median CPI continued to accelerate this month – both reaching new series highs (data back to 1984). From the sticky/flexible prices series; sticky prices continued to accelerate across both headline and core sticky prices (across all periods) – indicating that there may be some persistence to this bout of inflation. Other US data out last week reflects resilience in the economy given the pace of hikes so far. Retail sales increased more than expected by +0.3% and initial jobless claims continued to ease, now at +213k. Housing data will likely remain weaker as mortgage rates increased to 6% last week. This week, home builder sentiment (Sep) plus existing home sales, housing permits, and starts data for Aug will be released.
For the FOMC, it means that they are yet to see progress in reducing inflation. Markets now expect another 75bps increase this week. The statement and press conference will likely remain hawkish. The latest SEP will be released. As the FFR moves into restrictive territory, the projections will be insightful about the latest thinking on the pace of hikes. The FOMC has already signaled that it will be appropriate to slow the pace of hikes at some point.
Last week RBA Governor Lowe provided insight into the rates outlook at the RBA (source: House of Reps Testimony). According to Lowe, we are getting closer to ‘normal’ settings now. Likely to be discussing a 25 or 50bps at the next meeting (note inflation is yet to peak and the labour market is still strong). Rates should cycle somewhere between 2.5 – 3.5% over the long run. We’re at 2.35%, so getting to that range of ‘normal’, but still on the low side. Since that testimony, peak cash rate futures are back up to 3.9% by Jun 2023, as of 19 Sep (source: ASX).
Outlook for the week ahead;
FOMC meeting; expecting +75bps. Plus; A “Fed Listens” event is scheduled with Fed Chair Powell, Vice Chair Brainard, and Governor Bowman. Fed speeches are also likely after the FOMC meeting.
BoJ meeting; expecting no change to settings. Discussion on Yen weakness likely. Japan National CPI for Aug out before the meeting – expecting CPI ex fresh food at +2.7% up from +2.4% in Jul.
BoE meeting; expecting +50bps. UK CPI was little changed last week at +9.9%. The BoE may also vote on details regarding the outright sale of securities in its Asset Purchase Facility (source: BoE).
SNB meeting: expecting +75bps increase from -0.25% to +0.5%.
Other central bank events; speeches by RBNZ Governor Orr, ECB President Lagarde, and ECB Board member Schnabel, RBA Minutes, and a substantial number of other central bank decisions (not covered here).
Global prelim PMIs for Sep will be released later in the week starting with Europe, the UK, and the US. Stabilization in manufacturing activity ex Europe is expected. Services momentum is expected to remain weaker in Sep.
This week, the US Treasury will auction and settle approx. $221bn in ST Bills, with an approx. paydown of $7bn.
The US Treasury will also auction the 10-year TIPS and 20-year Bond – both will settle next week.
QT – Approx. $10.5bn in ST Bills will mature on the Fed balance sheet this week. Of this, approx. $2.2bn of maturing Bills will be redeemed and the remaining $8.3bn of maturing Bills will be reinvested.
There are no further Treasury or MBS purchase operations scheduled at this time.
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 | Sep 13, 2022
Key events for the week ahead – US CPI & retail sales
Recap from last week;
Central bank speeches and policy decisions continued to signal a firm commitment to address inflation to keep inflation expectations anchored.
US Fed Chair Powell remained hawkish and kept the option open for another large rate hike. Other speeches supported a further outsized increase. The market probability of another 75bps hike has now increased to over 90%. “It is very important that inflation expectations remain anchored,” Powell said, adding that the “clock is ticking” on ensuring that they stay that way.” Source: Bloomberg
The ECB delivered an outsized increase of 75bps while inflation is now expected to average +8.1% over 2022 in the Euro area. It is still early in the ECB hiking cycle and more rate hikes are expected; “Over next several meetings, the Governing Council will raise rates further to dampen demand against the risk of a persistent upward shift in inflation expectations.” Source: ECB
The BoC hiked by a further 75bps. While inflation has eased, it remains high, and concerns were noted over short-term inflation expectations; “Surveys suggest that short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched.” Source: BoC
The RBA hiked by a further 50bps and removed the reference to ‘normalizing policy’ in its statement. Inflation is expected to peak this year at 7.75%. In a speech later in the week, the RBA Governor noted the link between a de-anchoring of inflation expectations and interest rates; “A shift higher in inflation expectations will require higher interest rates. In time that would mean a sharper slowing of the economy. It is in our national interest that we avoid this.” Governor Lowe also indicated that the case to slow the pace of hikes becomes stronger “as the level of the cash rate rises”.
The headline J.P.Morgan composite global PMI for Aug reported a contraction in global output across manufacturing and service sectors for the first time since the start of the pandemic. At the same time, future output growth expectations continued to improve.
Outlook for the week ahead;
In the lead-up to the FOMC meeting next week, the focus is on US CPI and retail sales for Aug. The monthly US CPI change is expected to fall slightly by -0.1% (from -0.02% in Jul). The annual inflation rate is expected to slow to +8.1% in Aug from +8.5% in Jul. Core inflation will be closely watched and growth is expected to remain at +0.3% over the month and increase to +6.1% over the year.
US retail sales growth is expected to remain flat in nominal terms in Aug.
With the FOMC meeting next week, we are now in the blackout period for Fed speeches.
The UK CPI (Aug) is expected to increase to +10.2%, up from +10.1% in Jul. Monthly CPI is expected to remain at +0.6%. The UK labour market survey for the three months to Jul will also be released. These will both be key inputs into the BoE policy meeting which has been postponed until 22 Sep.
The Aus labour market report for Aug is expected to show +35k growth in employment, an increase in the participation rate to 66.6%, and the unemployment rate to remain at 3.4%.
This week, the US Treasury will auction and settle approx. $312bn in ST Bills, Notes, and Bonds, raising approx. $3bn in new money.
QT Summary; Approx. $25bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week. Of this, approx. $13bn of maturing Notes, Bonds, and Bills will be redeemed and the remaining $12bn in maturing Bills 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 | Sep 5, 2022
Key events for the week ahead – Central bank policy decisions and speeches, including Fed Chair Powell, and global services PMIs
US non-farm payrolls remained solid, coming in higher than expected at +315k (expecting +285k) for Aug. There was a notable downward revision to the Jun payrolls growth and only a slight change for Jul. The US household employment survey recorded the largest increase in employed persons of the last five months of +442k but this was all growth in part-time employment. The unemployment rate increased slightly as more people returned to the labour force. Markets were still split between a 50 and 75bps increase at the next FOMC meeting.
Fed-speak last week maintained the hawkish tone. NY Fed President Williams expects rates to continue higher and remain there until inflation is subdued. Policy settings will need to be restrictive “for some time” and this would require real rates to be positive. More Fed-speak this week will be important in the lead-up to the next FOMC meeting and includes Fed Chair Powell, Vice Chair Brainard, and Governor Waller
US manufacturing momentum remained in expansion territory in Aug with the ISM and S&P PMIs at 52.8 and 51.5, respectively. Both surveys recorded weakness in output growth, while input prices continued to moderate. US factory orders for Jul (-1%) confirmed the weakness in orders recorded in the regional manufacturing surveys through Jul – a trend that continued into Aug.
The JP Morgan global manufacturing PMI for Aug weakened further and recorded only modest expansion at 50.3. Global output and new orders contracted. Overall manufacturing activity contracted in key markets including China, Germany, the broader Eurozone, Canada, Mexico, South Korea, Taiwan, and Poland. From the JP Morgan global manufacturing PMI note:
The outlook is also increasingly weak. The orders:inventory ratio in August fell to its lowest level since May 2020, and the further deterioration in orders points to additional excess capacity building at factories.
Global services PMIs are due this week. The US ISM services PMI for Aug is expected to ease to 54.9.
The Euro area flash CPI for Aug surprised to the upside with inflation at +9.1% (expecting +9%). This will add further pressure on the ECB this week, which is expected to increase rates by 50bps (a 75bp increase has also been floated). Since the ECB affirmed its commitment to bring down inflation at Jackson Hole, the energy shock and geopolitical pressure have only increased. The Euro area group will meet this week to address the ‘economic situation and coordination of the macroeconomic policies in the euro area’. This will likely include further fiscal spending.
The RBA is expected to increase rates by 50bps this week. The effect of rate increases is starting to be reflected in the housing market with notable falls in new housing finance last week. Aussie Q2 GDP will be released this week and growth is expected to increase by +1.2% for the quarter and +3.8% over the year. RBA Governor Lowe is scheduled to speak during the week.
The BoC is expected to raise rates by 75bps this week. That comes on the back of a surprise 100bp increase in Jul. The latest CPI for Jul is elevated at +7.6%, slowing slightly from +8.1% in Jun. Growth remained robust in Q2 while manufacturing activity has started to slow.
Also; A new leader of the UK conservative party, and PM, is to be announced. BoE Governor Bailey is also expected to speak this week. OPEC to meet on supply.
This week, the US Treasury will auction and settle approx. $255bn in ST Bills, raising approx. $10bn in new money.
Approx. $19.8bn in ST Bills will mature on the Fed balance sheet this week. Of this, approx. $4.1bn will be redeemed and the remaining $15.7bn in maturing Bills 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 | Aug 29, 2022
Key events for the week ahead – US non-farm Payrolls, Fed speak, Euro area CPI for Aug, PMI’s
Recap from last week
The markets continue to digest the hawkish message from Jackson Hole – that central bankers (except the BoJ) are committed to addressing high inflation, with rates likely to remain higher for longer. This has been the key message from the US Fed over the last few weeks (via speeches and Minutes).
Fed Chair Powell set the tone and used his opening remarks at Jackson Hole to further distill the key messages of the last few weeks. The shorter message: as long as inflation stays high, rates will stay high. Emphasis was on the FOMC moving ‘purposefully’ to a sufficiently restrictive level to return inflation to 2% and taking ‘forceful and rapid steps’ to ensure inflation expectations remained anchored. It was noted that there will be some pain, and to expect softer growth and labour market conditions (so while inflation is still high, don’t expect rate cuts). The current long-run neutral rate is not the place to stop and claim a premature victory. Once at a sufficiently restrictive level, that policy stance will likely be maintained ‘for some time’, and until the Fed is ‘confident that the job is done’. Chair Powell referenced the median projection of the FFR of just below 4% in the SEP (as of June) – maybe as a guide for an appropriately restrictive level of the FFR.
Towards the end of the speech, Fed Chair Powell referenced the period of ‘high and volatile inflation’ of the 1970’s and 1980’s – noting that the FOMC deliberations build on the lessons of that period. The world is once again in a high and volatile inflation environment.
The flash PMI’s released last week for Aug were disappointing. Slower growth momentum was recorded across the G4 countries. Weaker orders are still a key theme. Manufacturing output contracted – most notably in the UK, but also in Germany and the Eurozone. Services momentum also slowed, but less so in the UK. The US Services sector continued to contract at a notable pace (from 47.3 in Jul to 44.1 in Aug).
US PCE inflation for Jul mirrored that of the CPI for Jul with a slight decline in the month and headline easing to +6.3% in Aug from +6.8% in Jul. Durable and non-durable goods prices declined in the month while services prices were little changed at +0.1%. Core PCE inflation slowed to +4.6% over the year in Aug.
Outlook for the week ahead
The main focus for the week will be US non-farm payrolls for Aug – the second last important data point before the next FOMC meeting. Nonfarm payrolls are expected to increase by +285k in Aug after a +528k increase in Jul. The unemployment rate is expected to remain at 3.5% and participation unchanged at 62.1%. The high frequency initial jobless claims data has been more positive in recent weeks with claims now under +250k.
US Fed speakers are scheduled throughout the week, including Vice Chair Brainard. Speeches are expected to build on the hawkish message.
The flash Aug CPI for the Eurozone will be released this week (including country-level data throughout the week). Inflation is expected to increase by +1.1% in the month (from +0.1% in Jul) and to increase to +9% over the year (from +8.9% in Jul).
The final global PMI’s for Aug will be released through the week starting with manufacturing. The official Chinese PMI’s will also be released and are expected to show slower growth momentum.
This week, the US Treasury will auction and settle approx. $380bn in ST Bills, Notes, Bonds, and TIPS, raising approx. $77bn in new money.
Approx. $37bn in ST Bills and Notes will mature on the Fed balance sheet this week and will be rolled over. Approx $10bn in Notes, Bonds, and Bills will roll-off the Fed balance sheet this week (QT).
Quantitative Tightening for September – The higher month cap of $60bn for Treasuries comes into effect in Sept, starting this week. Approx. $43.6bn in SOMA Coupons on the Fed balance sheet will mature in Sept (15 and 30 Sep). As this total is below the $60bn cap, all maturing Coupons will be redeemed this month. That means that maturing Bills on the balance sheet will make up the residual $16.3bn of the $60bn redemption cap and will also roll-off the balance sheet 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
