by Kim | Aug 22, 2022
Key events for the week ahead – Jackson Hole Economic Symposium
Recap from last week
The minutes of the Jul FOMC meeting quelled the idea of a dovish Fed pivot at this time. The minutes showed that moving to a “restrictive stance of policy was required” given the elevated level of inflation. The Fed is still concerned about the upside risks to inflation and of inflation expectations becoming unanchored. Even though the Jul CPI had moved lower, the FOMC noted that declines in the price of oil and other commodities “could not be relied on as providing a basis for sustained lower inflation”.
But as policy tightens further, the FOMC said that it would be appropriate to “slow the pace of increases” as it assesses the cumulative impact of hikes/tightening. Once policy was “sufficiently restrictive” it may also be appropriate to maintain that level to ensure inflation was firmly on a path back to 2%. In other words, rates may stay higher for longer, depending on the path of inflation and the economy. The unanswered question; what is the ‘appropriate’ level of restrictive policy rates?
Data out of the US was mixed last week. The recent negative trend in initial jobless claims has reversed somewhat. The weekly growth in initial claims remains around +250k. US headline retail sales growth for Jul was slightly lower than expected – led by declines in motor vehicles and gasoline, noting that gasoline prices declined by over 7% in the month. Ex autos and gasoline, retail sales increased by +0.7% in Jul (+0.7% in Jun). The regional manufacturing surveys for Aug continued to reflect weakness in new orders. But industrial output and, specifically, manufacturing output growth improved in Jul. Data on the US housing market continued to disappoint with conditions deteriorating further in Aug and existing home sales also falling notably in Jul.
Inflation outside of the US is still extremely elevated as energy prices in the UK and Europe continue to rise. UK CPI in Jul was +10.1% (expecting +9.8%). UK core CPI was also higher at +6.2% (expecting +5.9%). Eurozone CPI for Jul was confirmed at +8.9% and +0.8% in the month. Germany’s PPI for Jul surprised to the upside, increasing by 37.2% over the year (expecting +32.7%) and increasing by over 5% in the month. This was led by but was not limited to, further increases in electricity and natural gas prices. The headline CPI for Japan also increased more than expected in Jul by +2.6% (expecting +2.2%). This was led mostly by higher food prices, but also a smaller contribution from prices for electricity & gas charges, clothing, and communications.
The outlook for the week ahead
The annual Kansas City Fed Jackson Hole Symposium will be the main event this week – “Reassessing Constraints on the Economy and Policy”. US Fed Chair Powell will speak on Friday morning. We expect a continued hawkish tone. Chair Powell isn’t likely to provide any detail for the Sep FOMC meeting, given another CPI and payrolls report is due before then.
US PCE inflation for Jul will be released on Fri, along with the University of Michigan consumer sentiment reading for Aug.
The prelim S&P PMIs for Aug will be released this week and will provide a further guide on private sector momentum compared to Jul. Growth is expected to ease slightly, especially across Europe and the UK.
The Minutes of the last ECB meeting will also be released.
This week, the US Treasury will auction and settle approx. $313bn in ST Bills and 2yr FRN’s, raising approx. $102bn in new money. Treasury issuance will be supplemented with the addition of a 21-Day CMB ($60bn). The US Treasury will also auction approx. $126bn in 2yr, 5yr, and 7yr Notes – which will settle on 31 Aug.
Approx. $17bn in ST Bills will mature on the Fed balance sheet this week and will be rolled over.
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 15, 2022
Key events for the week ahead – FOMC Minutes, RBA Minutes, RBNZ monetary policy meeting, US retail sales, inflation; UK, Canada, & Japan
Recap from last week
US headline CPI decelerated slightly more than expected to +8.5% in Jul (expecting +8.7%) – from +9.1% in Jun. The monthly CPI declined slightly by -0.02% (expecting +0.2%). The main contributor to the slower inflation print was the fall in energy prices, especially gasoline prices. Core goods also contributed slightly to the headline deceleration as new and used car & truck price growth slowed (has been easing for six months). But food price growth continued to accelerate in the month and over the year while core services price growth remained at +5.5%.
Measures of median and trimmed mean CPI continued to accelerate in Jul, suggesting that underlying inflation pressures remained persistent. Inflation expectations from the University of Michigan survey show an easing in inflation expectations for the next year down to 5% (down from a peak of +5.4%), but expectations for inflation over the next five years were unchanged at 3% (equal to the recent peak).
The pace of wage growth is also an important barometer for the FOMC. The Atlanta Fed wage tracker showed wage growth continued to accelerate through Jul. While a welcome boost to real income, it suggests continued tightness in the labour market. The NY Fed Global Supply Chain Pressure Index suggests that the supply chain shock (which accounted for some of the inflation pressure) continues to ease, but that supply chain pressures still are historically elevated.
Fed signaling was consistent; ‘not near done yet’ as inflation is still well above the 2% target, but a step in the right direction. Over the last two weeks, the Fed has repeatedly attempted to quash the idea of a Fed pivot, or that rates might be cut in 2023 while inflation remains so far above the target. Kashkari, Daly (more of a dove), and Barkin speeches supported a further outsized hike for Sep (none are voting members in 2022). Daly was less hawkish but noted she was “looking for the data in the aggregate to affirm the Fed is on a path to bring inflation down substantially and achieve the price stability target”. Kashkari went as far as saying that Fed credibility was on the line as it works to bring inflation back to its mandated 2% target.
Outlook for the week ahead
The US FOMC will release the minutes of its last meeting. After that meeting, the decision was interpreted as a ‘pivot’ and the minutes may provide further insight into that and the outlook for Sep. US retail sales growth is expected to slow to +0.1% in Jul (from +1% in Jun). US housing data is expected to show further slowing of existing home sales to 4.88m (SAAR) and housing permits and starts in Jul. The high-frequency initial jobless claims data will continue to be monitored as it edges up over +260k.
The RBA will release the minutes of the Aug meeting. The Board increased the cash rate target by 50bps, expected further hikes were necessary to bring down inflation but signaled its intent to keep the economy ‘on an even keel’. The important wage price index for Q2 is expected to show further acceleration in wages of +0.8% over Q2 and +2.7% over the year (from +2.4% in Q1). The labour market in Jul is expected to remain strong with +25k growth in employment, participation unchanged at a high of 66.8%, and the unemployment rate remaining at a low 3.5%.
The RBNZ is expected to increase rates by 50bps to 3%.
Inflation readings for Jul: Japan; headline CPI is expected to slow to +2.2% (from 2.4% in Jun), UK CPI is expected to accelerate to +9.8% in Jul (from +9.4% in Jun), and Canadian CPI is expected to slow to +7.6% in Jul (from 8.1% in Jun).
This week, the US Treasury will auction and settle approx. $329bn in ST Bills, Notes, and Bonds, raising approx. $74bn in new money. The US Treasury will also auction approx. $23bn in 30yr TIPS and 20yr Bonds – which will settle on 31 Aug.
Approx. $81bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be rolled over. Approx $23bn in Notes & Bonds will mature and be redeemed as a part of the QT balance sheet roll-off.
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 8, 2022
Key events for the week ahead – US CPI
Recap from last week
US Fed speeches walked back market interpretations of a Fed ‘pivot’ from the last FOMC meeting. Speakers remained hawkish, signaling their commitment to bring down inflation, that there was ‘still a long way to go to reach the price stability target of 2%’, and that the Fed was looking for “compelling evidence” of inflation slowing.
Stronger US data helped to offset the emerging recession narrative. This was led by higher-than-expected growth in non-farm payrolls for Jul of +528k (versus +250k expected). Average hourly earnings also increased by more than expected. The household employment survey was mixed; employment growth was positive, but low for the month. The unemployment rate still declined to 3.5% because more people left the labour market. Initial claims continued to edge slightly higher.
The Jul US ISM PMI surveys diverged. The manufacturing PMI recorded a further, albeit slight slowdown in momentum (similar to the S&P PMI). Manufacturing demand contracted led by domestic orders while new export orders rebounded. The ISM Services PMI recorded improved momentum as growth in orders and output were more widespread in Jul. This is in stark contrast to the S&P services PMI which recorded a sharp contraction in the US services sector in Jul.
The BoE surprised markets by increasing the bank rate by a further 50bps. It was also a notable meeting in that the inflation forecast was upgraded to peak around +13% in Q4 2022 and the BoE announced that it expects the UK to enter a recession from Q4 2022. The BoE staff presented a strategy for the outright sale of UK Gilts held on the BoE balance sheet. This program will be voted on at the Sep meeting and is likely to begin shortly thereafter. This week, UK Q2 GDP will be released, and the economy is expected to contract by -0.2% in Q2.
The RBA increased the cash rate target by a further 50bps last week. There was little in the way of guidance other than further normalization is to be expected in the coming months due to high inflation. The Board needs to see elevated inflation come down (forecast to take about 2 years to get back to the 2-3% range) to the target but is intent on keeping the economy ‘on an even keel’.
The Jul S&P PMIs reflected slower growth momentum in manufacturing and services activity in many developed markets. There were notable falls in headline PMIs in US services (-5.4pts), Mexico manufacturing (-3.7pts), Taiwan manufacturing (-5.2pts), and Japan services (-3.7pts).
The week ahead
Inflation will be the key theme this week. The US Jul CPI report will be one of two CPI reports before the next FOMC meeting in Sep. Inflation data generally, will be important in the context of the next steps for the path of rates in the US and will be closely monitored over the next six weeks. The expectation is for Jul CPI to have slowed to +8.7% (from +9.1% in Jun). The monthly growth will be closely watched with CPI expected to increase by just +0.2% in Jul after increasing by +1.3% in Jun. Core measures of CPI are expected to stay elevated at +6.1% over the year and +0.5% for the month. Fed speeches after the CPI release are expected. The prelim Aug University of Michigan consumer sentiment, including inflation expectations, and Q2 unit labour costs will also be released this week.
There will be other measures of inflation reported this week with four European final CPI reports for Jul (Germany, France, Italy, and Spain), China CPI for Jul, and Aus consumer inflation expectations for Aug.
This week, the US Treasury will auction and settle approx. $265bn in ST Bills, raising approx. $40bn in new money.
The US Treasury will also auction approx. $98bn in 3yr and 10yr Notes and 30yr Bonds – which will settle next week.
Approx. $22bn in ST Bills will mature on the Fed balance sheet this week and will be rolled over.
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, 2022
Key events for the week ahead – Global PMIs for Jul, BoE and RBA decisions, and US non-farm payrolls
The FOMC raised the FFR target by 75bps to 2.25%-2.5%. The FOMC has followed its plan to increase rates ‘expeditiously’ to the ‘neutral’ rate. In a highly contentious statement, Chair Powell said that the neutral level had probably been reached after the Jul hike. The Fed will take a measured approach to the next rate increases, as the FFR likely starts to increase into more restrictive territory. Some saw this decision as a pivot, especially compared to the overtly hawkish tone in the Jun meeting (after the May CPI shock when the Fed was seen as behind the curve and notably upped its hawkish rhetoric). Still, the FOMC stated that another ‘unusually large’ hike could be appropriate, depending on the data. At the very least, ongoing increases are still appropriate.
The FOMC acknowledged a willingness to accept a period of ‘below-trend’ growth in the short term to achieve lower inflation over the long term. Soft demand isn’t going to get the Fed to pivot unless there is a material deterioration in the labour market. And inflation is yet to fall – although easing in inflation is expected now that energy/commodity prices have fallen from recent peaks. With greater data uncertainty, FOMC guidance has been reduced. We continue to focus on Fed speak/signaling, inflation, labour market indicators, and broader growth momentum going into the next meeting.
US data last week showed another decline in Q2 GDP (advance release). The slowdown was more broad-based than the decline in Q1. The PCE inflation for Jun though, surprised to the upside with a strong increase in the month of +1% (up from +0.6% in May) and the annual rate increasing to +6.8% from +6.3% in May.
US data this week will provide a good overview of the US labour market. Non-farm payrolls for Jul are expected to increase at a slower pace of +250k. The unemployment rate is expected to remain at 3.6% with little/no change in participation at 62.2%. Initial claims will be watched closely – which were revised higher in prior weeks and is now up to +250k/week. JOLTS data for Jun will also be released. On the growth front, the ISM surveys for Jul will be in focus – especially after the weaker flash US PMIs (output). Regional manufacturing surveys in Jul have been mostly stable after the deterioration in Jun, but there are pockets of weakness.
It was mixed news for the ECB with faster growth in Q2 but higher inflation. Euro area Q2 GDP growth surprised to the upside, increasing by +0.7% (expecting +0.1%) versus +0.5% in Q1. But Germany’s GDP growth slowed to 0% in Q2. The Euro area flash inflation for Jul was higher than expected at +8.9% (expecting +8.7%) versus +8.6% in Jun. But the monthly growth slowed notably to +0.1%. Similarly, Euro area core CPI accelerated to +4% from +3.7% in Jun, but the monthly pace declined by -0.2%. This week, a further read on growth momentum from the Jul PMIs, retail sales, and Germany factory orders and industrial production.
The BoE is expected to increase rates by a further 25bps this week. UK inflation is still elevated at +9.4% in Jun having accelerated from +9.1% in May.
The RBA is expected to increase rates by a further 50bps this week. Headline CPI came in slightly lower than expected at +6.1% (expecting +6.3%), but still higher than the +5.1% inflation recorded in Q1. Measures of core CPI also accelerated to over 4% and well above the target band of 2-3% inflation. Aus economic activity and the labour market have remained resilient, while there have been some signs of softening in the housing market. The RBA is expected to release its latest inflation forecasts in the Statement on Monetary Policy.
This week, the US Treasury will auction and settle approx. $398bn in ST Bills, Notes, Bonds, and FRNs raising approx. $47bn in new money. Approx. $21bn in ST Bills will mature on the Fed balance sheet this week and will be rolled over.
The revised US Treasury Q3 refunding schedule and the estimate for Q4 will be released this week on 3 August 2022. Overall financing estimates will be released on 1 August 2022.
Quantitative Tightening Overview – August 2022
This is the final month of the lower $30bn cap on the decline in Treasury Securities on the Fed balance sheet. This cap increases to $60bn in September.
Approx. $111.4bn in SOMA Coupons will mature this month (15 and 31 Aug). Of the $111.4bn, a total of $30bn (the cap) will be redeemed and the remaining $81.4bn in maturing Coupons will be reinvested. Given that the value of Coupons maturing is greater than the redemption cap this month, Bills maturing in August will be rolled over/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 | Jul 25, 2022
Key events for the week ahead – FOMC monetary policy decision, US and Euro area Q2 GDP growth, and inflation data
Recap from last week
There were several notable parts of the ECB decision last week. The ECB increased its key interest rates more than expected by 50bps, to ‘front-load’ increases, and noted that further normalization of monetary conditions would be appropriate given the updated inflation assessment. The ECB announced its ‘anti-fragmentation tool’ the Transmission Protection Instrument. Given the highly uncertain geopolitical environment, the ECB also announced a ‘transition to a meeting-by-meeting approach to interest rate decisions’, effectively halting forward guidance. The ECB noted that activity is slowing in the Eurozone, due to both the invasion of Ukraine and high inflation impacting demand.
The Jul flash PMIs showed a continued broad-based slowdown in growth momentum, including slower order growth and declines in export orders. Services output growth slowed across all markets. Manufacturing output contracted across most markets, except Australia, and contracted more notably in the Euro area (led by Germany). In Germany, finished goods inventory increased at a near record rate highlighting the scale of the slowdown in demand.
The contraction in the US services PMI output component was notable, falling by -5.7pts. New export orders also contracted. This is roughly in line with the weakening conditions in the housing market with continued declines in mortgage applications, substantial falls in existing home sales for Jun, and weaker housing market conditions in Jul. The US flash manufacturing PMI for Jul showed contracting demand and flat output growth as firms worked through backlogs in the absence of higher demand. The other important development has been the small, but consistent increase in initial jobless claims, now up to +251k as of last week.
Outlook for the week ahead
In the US, the FOMC is expected to increase rates by another 75bps this week bringing the FFR target to 2.5%. We’ll be looking for how signaling might shift as the FFR reaches 2.5% (around the “neutral rate”). Will the FOMC start to signal smaller hikes? Does the FOMC start to show a degree of sensitivity to slower growth and/or easing inflation?
US data this week should provide a further guide on the growth momentum. A key focus will be on the high-frequency initial jobless claims data (expecting around +250k). GDP in Q2 (prelim) is expected to grow by +0.4% on a SAAR-basis, up from -1.6% in Q1 (Q1 GDP showed more resilient private sector demand, but fell due to the change in inventories and net exports). The PCE price inflation data for Jun is expected to show little change from the +6.3% increase in May. Other data includes personal income and spending for Jun, durable goods orders for Jun, consumer sentiment for Jul, and more regional manufacturing surveys for Jul.
Euro area data this week will also provide a guide on growth and inflation momentum. The prelim Q2 GDP for the Euro area (and country-level data) will be released. Euro area growth is expected to slow from +0.6% in Q1 to +0.1% in Q2. The prelim Euro area CPI data for Jul will also be released (including country-level inflation data). The Euro area CPI is expected to accelerate slightly to +8.7% in Jul from +8.6% in Jun.
Finally, important Q2 CPI data for Australia will be released – a timely update for the RBA board meeting next week when a further hike in interest rates is expected. Annual CPI is expected to accelerate to +6.3% in Q2 up from +5.1% in Q1. The QoQ increase is expected to slow to +1.9% in Q2 from +2.1% in Q2.
This week, the US Treasury will auction and settle approx. $248bn in ST Bills and 10yr TIPS raising approx. $51bn in new money. The US Treasury will also auction the 2yr, 5yr, and 7yr Notes and the 2yr FRN this week and will settle early next week.
Approx. $24bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be rolled over. Approx. $16bn in Notes and Bonds (making up the remainder of the monthly $30bn cap) 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
