by Kim | Feb 6, 2023
Key events this week – Central bank speeches including Fed Chair Powell, RBA monetary policy decision.
Recap from last week
As expected, the FOMC increased the FFR target by 25bps. Guidance was unchanged and the main points were clear; “ongoing increases will be appropriate” and “it is our judgment that we’re not yet at a sufficiently restrictive policy stance”. The disinflationary process is at an early stage and more work needs to be done. Chair Powell noted that the ‘super core CPI’ highlighted in his Brookings speech was unchanged and sticky. The FOMC will need to stay the course, won’t loosen policy prematurely, and will likely need to maintain a restrictive stance for some time. Yet, markets saw a green light when Chair Powell did not push back (unlike at Jackson Hole) when asked whether recent easing in financial conditions would make the job harder to bring down inflation.
The significantly stronger non-farm payrolls for Jan quickly shifted the narrative. The Jan non-farm payrolls increased by +517k jobs – well above even the highest estimates. Most of the job gains were in services, but goods-producing payrolls also increased at an above-average pace. The unemployment rate remained low or little changed (25-54 years) despite a larger increase in participation (mostly across the core working age group). Other labor market indicators remained strong; job openings were higher, ECI growth slowed but remained elevated at +5.1%, and initial claims remained low despite larger layoff announcements. For now, the stronger labor market conditions provide scope for further tightening if inflation stays persistent.
The US ISMs for Jan were mixed. Manufacturing activity remained subdued while services activity rebounded strongly in Jan. Prices were stickier across both sectors this month.
The ECB and BoE increased rates by 50bps. The ECB signaled its intention to hike another 50bps in Mar before “evaluating the subsequent path of our monetary policy”. Euro area CPI eased back to +8.5% as energy prices continued to fall while core CPI accelerated to +5.2%. The BoE noted that if price pressure persisted, then further tightening in monetary policy would be required. Inflation in the UK remains extremely elevated but is expected to “fall sharply” over the rest of the year. This week, UK Q4 GDP growth is expected to be flat at 0% after falling by -0.3% in Q3.
The Jan global PMIs were more encouraging. The output contraction eased to only a subdued pace of decline. Manufacturing activity “moved closer to stabilization” and services activity rebounded, especially through the Eurozone. Input price inflation increased at a faster pace across both sectors, while optimism lifted regarding future output growth.
Outlook for the week ahead
A light data week.
Speeches by central bankers will feature in the outlook this week. US Fed Chair Powell will take part in a discussion at the Economic Club of Washington. Other US Fed speeches include Governor Waller, NY Fed President Williams, and Philadelphia Fed President Harker.
We will continue to watch high-frequency US data. Initial claims remain an important early indicator amid elevated job cut announcements. Claims are expected to increase slightly to +194k this week. Similarly, the recent bounce in mortgage applications reversed sharply last week (adjusted for the prior shorter holiday week) despite falling mortgage rates.
The RBA is expected to increase the cash rate by 25bps this week. Inflation accelerated in Q4, coming in higher than expected, while the labor market remains resilient. The RBA will stay concerned and vigilant over the impact of rising rates on household spending and housing.
Last week, the US Treasury borrowing requirement (net cash) for Q1 was increased notably from $578bn to $932bn. This increase is reflected in the higher issuance of ST Bills for the quarter. The estimated Net Bill issuance for Q1 was revised to $655bn (from $301bn) and the estimated Net Coupon issuance over the quarter remained unchanged at $277bn (prior was net $300bn). The expected cash balance at the end of Q1 was unchanged at $500bn. The revised higher issuance for Q1 was the result of a lower-than-expected cash balance at the end of Q4 2022 and a projection of lower tax receipts and higher outlays over Q1.
This week, the US Treasury will auction and settle approx. $279bn in ST Bills raising approx. $60bn in new money.
The US Treasury will also auction the 3-year and 10-year Notes and the 30-year Bond this week. All will settle next 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 | Jan 30, 2023
Key events this week – Central bank policy decisions; FOMC, BoE, and ECB, US non-farm payrolls
Recap from last week
US inflation moderated in line with expectations. Headline US PCE inflation came in at +5% for Dec, slowing from +5.5% in Nov, led by falling energy prices. Core PCE eased as expected to +4.4%. The ‘super core’ measure emphasized by Fed Chair Powell remained little changed at just above +4% – highlighting the stickier nature of underlying inflation.
US growth was more robust than expected in Q4, increasing at an annualized pace of +2.9%. Growth is slowing, but not as much as expected. The data late in Q4 suggested some softening of US activity, as shown by falling retail sales and industrial production. But more recent growth in personal income, adjusted for inflation, has continued to accelerate. The 6mth SAAR of personal income (ex-transfer payments) adjusted for inflation reached +2.9% in Dec. The 10-year pre-pandemic avg is +3.1%. While spending growth has eased, the saving/surplus between income and spending, has instead started to increase again but remains well below the pre-pandemic level.
Continued strength in the US labor market will be important to help support income growth while the balance between consumption and saving adjusts. Initial claims continued to move lower last week to +186k despite further anecdotes of planned job cuts. The Jan non-farm payrolls growth this week is still expected slow, but remain robust at +175k jobs added.
The BoC has now signaled a likely pause in its hiking cycle to assess the impact of rate increases.
Aus CPI came in higher than expected at +7.8% (the RBA had previously noted a higher Q4 CPI print was expected). Aus PMIs and business surveys suggested some stalling in activity.
The G7 prelim PMIs for Jan showed services output improved (less negative in most cases) while manufacturing activity remained at a stalled pace.
Outlook for the week ahead
This week the FOMC is expected to step down to a pace of a 25bps rate hike. As growth and the labor market continue to hold up, the focus will be on remaining at a sufficiently restrictive level to help bring down inflation. Not likely to see a dovish shift as the job on inflation is not yet done. The tone is not likely to be overly hawkish though given some emerging weakness in economic activity. There may be greater emphasis on the optionality of “data dependence”.
The ECB is expected to increase rates by 50bps this week to 2.5%. Inflation is still elevated. The latest CPI for the Euro Area will be released before the ECB announcement. The prelim Jan CPI is expected to fall in the month, but remain elevated over the year at +9.1%. The prelim Eurozone GDP for Q4 is expected to contract slightly by -0.1%.
Similarly, the BoE is expected to increase rates by a further 50bps to 4%. Inflation is still elevated at +10.5%.
US labor market data will be in focus; non-farm payrolls are expected to increase by +175k in Jan. The Employment Cost Index (ECI) will also be released this week and will be an important marker for the pace of wage growth – expecting +1.2% for Q4. The Dec JOLTS report is expected to show a further slowdown in job openings to 10.2m. The Jan US ISM PMIs will also be released.
The S&P PMIs for Jan will provide a reading on the broader global growth momentum in Jan.
The US Treasury will auction and settle approx. $452bn in ST Bills, Notes, Bonds, TIPS, and FRN’s raising approx. $49bn in new money.
Approx $17.4bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $37bn in ST Bills, Notes, Bonds, and FRN’s will mature on the Fed balance sheet this week and will be redeemed/roll-off the Fed balance sheet.
The latest US Treasury borrowing requirements and Q1 refunding 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 | Jan 23, 2023
Key events this week – US PCE Price Index, US GDP Q4, Aus & NZ CPI Q4, BoC policy meeting
Recap from last week
US data was mixed last week. Consumer spending and industrial output fell in Dec, while initial jobless claims remained low. Housing data was weak, but there was some sign of stabilizing. The FOMC is likely to step down to 25bps next week.
US retail sales fell more than expected in Dec and the decline was broad-based. The decline in the 6mth annualized change of real retail sales (now -3.8%) shows the slowdown in consumer spending gathered pace in Dec.
US Industrial production data confirmed recent survey weakness. Manufacturing output declined again and has now fallen behind a year ago (-0.5% below Dec 2021 versus up by +3.8% just back in Sep). Output growth has slowed notably over each of the last three months across both durable & non-durable goods industries.
Housing data showed some stabilization in home builder sentiment, while existing home sales continued to fall, albeit at a slower pace. Existing home sales have fallen to be only +0.2% ahead of the 2020 pandemic low. Mortgage purchase applications were stronger in the latest week aided partly by slightly lower mortgage rates.
Despite the weakening Dec data, US initial jobless claims (SA) fell below the 200k/week level to +197k for the week ending 14 Jan. Continuing claims were little changed.
US Fed speeches suggested that a further slowing in the pace of hikes could be expected next week. Vice Chair Brainard noted that the recent ‘downshift’ enables the FOMC to assess more data, while also reiterating that the policy rate will need to be sufficiently restrictive for some time given high inflation. The shift to a 25bps hike was all but confirmed with a WSJ article on 22 Jan – “Federal Reserve officials are preparing to slow interest-rate increases for the second straight meeting”.
The BoJ left policy unchanged last week. Guidance remained that the BoJ “will not hesitate to take additional easing measures if necessary; it also expects short- and long-term policy interest rates to remain at their present or lower levels”. Inflation is expected to decelerate toward the middle of the year while the median forecast for core inflation over 2023 was revised slightly higher to +1.8%. Actual core inflation (ex-fresh food & energy) increased to +3% in Dec (from +2.8% in Nov). Monthly core inflation slowed to +0.1% in Dec.
Outlook for the week ahead
US headline PCE price inflation for Dec is expected to ease from +5.5% in Nov. Core PCE is expected to ease to +4.4% in Dec from +4.7% in Nov. The advance estimate for US GDP growth in Q4 is expected to slow to an annualized pace of +2.6% (from +3.2% in Q3). Moderating inflation and growth will be important inputs for the FOMC meeting next week on 1 Feb.
Aus and NZ Q4 CPI will be released this week. Aus CPI is expected to moderate to +1.6% in Q4 but accelerate over the year to +7.5%. The next RBA meeting is on 7 Feb. NZ CPI is expected to ease slightly over the year to +7.1%. The next meeting of the RBNZ is on 22 Feb.
The BoC is expected to increase rates by a further 25bps and may then signal a pause in the hiking cycle. Inflation eased to +6.3% in Dec mainly due to lower energy prices. Core median inflation was little changed at 5% in Dec. Retail sales declined in Nov, with core retail falling the most in eleven months.
The prelim S&P PMIs for Jan 2023 will be released this week providing a gauge of global growth momentum going into the new year.
It will be another big week of US Treasury issuance. The US Treasury will auction and settle approx. $368bn in ST Bills (including another CMB) raising approx. $110bn in new money.
The US Treasury will also auction the 2, 5, and 7-year Notes and the 2yr FRN this week – to settle on 31 Jan.
Approx $18bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $1.3bn in ST Bills will mature on the Fed balance sheet this week and will be redeemed/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 | Jan 16, 2023
Key events for the week ahead – US retail sales, Fed speak, BoJ policy decision, CPI reports; Japan, Canada, UK, and the Eurozone, China GDP, Davos
Recap from last week
US CPI slowed again in Dec to +6.4% (from +7.1% in Nov). The monthly pace declined slightly. Food, core goods, and (mainly) energy prices contributed to the deceleration between Nov and Dec. The more nuanced view of CPI now taken by the FOMC is to look at underlying inflation via core services ex shelter. The closest metric, services excluding rent of shelter, accelerated from +7.3% in Nov to +7.4% in Dec but is down from the high of +8.2% in Sep.
Despite the peak in headline CPI, the Cleveland Fed core measures of median and trimmed-mean CPI are only easing slowly and remain elevated. The median CPI for Dec slowed to +6.92% from +6.98% in Nov (the peak was +7% in Oct) – and is still showing a broad persistence of inflation. Even the month change remained high BUT is on a slowing trend. The trimmed mean CPI slowed to +6.5% in Dec from +6.6% in Nov (peaked at +7.3% in Sep).
Despite persistent underlying inflation, the soft-landing narrative has quickly gained favor as headline inflation has eased amid robust labor market conditions. Fed speeches last week supported slowing the pace of hikes to 25bps in Feb but reiterated the expectation of a higher for longer policy rate setting.
Aus CPI growth was higher than expected, accelerating to +7.4% in Nov. Inflation likely remains uncomfortably high for the RBA – keeping alive further rate hike expectations. The re-set of higher mortgage rates is a concern for the RBA trying to keep the economy on “an even keel”. The Aus labor market survey for Dec is out this week – and labor market conditions are expected to remain tight. The next RBA meeting is on 6 Feb.
Outlook for the week ahead
US retail sales for Dec will gauge how consumption has been affected during this tightening cycle. US retail sales are expected to fall -0.8% in Dec. US industrial production (including manufacturing) for Dec will be important in the context of the current weakness in manufacturing surveys and falling hours. US industrial production is expected to fall by -0.1% in Dec (after a -0.2% decline in Nov). Rounding out commentary on the trajectory of the US economy this week will be US earnings.
US Fed speak; This is the last week leading up to the blackout period ahead of the FOMC meeting on 1 Feb. US Fed Vice Chair Brainard and Board of Governors member Chris Waller will both speak on the economic outlook this week. They may signal a slower pace of hikes.
The BoJ is not expected to change policy settings this week, but another adjustment can’t be completely ruled out. The BoJ is expected to review the functioning of the wider band around the 10yr yield target.
CPI data should show further easing in headline inflation rates; UK CPI is expected to ease slightly to +10.6% in Dec from +10.9% in Nov. Canada CPI is expected to ease to +6.3% in Dec from +6.8% in Nov. Euro area CPI for Dec is expected to be confirmed at +9.2%. Japan’s core CPI ex-fresh food (BoJ preferred measure) is expected to accelerate to 4% while core ex-energy & fresh food is expected to be little changed at +2.8% in Dec.
Markets will look through weaker data in the lead-up to China’s exit from the Covid-zero policy. Chinese Q4 GDP is expected to contract by -0.8% in Q4.
This week, the US Treasury will auction and settle approx. $409bn in ST Bills (including a CMB), Notes, and Bonds, raising approx. $107bn in new money.
The US Treasury will also auction the 10-Year TIPS and 20-Year Bond this week – to settle on 31 Jan.
Approx $14bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $19.6bn in Notes, Bonds, TIPS, and ST Bills will mature on the Fed balance sheet this week and will be redeemed/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 | Jan 9, 2023
Key events for the week ahead – US CPI, US Fed Chair Powell panel discussion
Recap from last week
Data continued to paint a picture of a reasonably robust US labor market despite slowing employment growth momentum. Growth in average hourly earnings slowed but highlighted the noisy nature of the ‘average’ as the prior month (Nov) was revised from an uncomfortably high (for the FOMC) +0.6% to +0.4%. The Dec month growth slowed to +0.3% as the annual growth slowed to +4.6% (expecting +5%). The FOMC will likely see this as a step in the right direction.
While payroll growth slowed to +223k, it is still above the level needed to absorb population growth (approx. +100k jobs). Employment growth in the household survey increased more notably for the month by +717k – but was led almost entirely by part-time employed persons (+679k). Participation increased at the same time that the unemployment rate fell even further. The unemployment rate for the core working age group 25-54 years fell to 2.95% in Dec (from +3.27% in Nov). The 16yr+ unemployment rate fell to 3.47% (from 3.65% in Nov). The Nov JOLTS survey showed a slowing in openings and hires but layoffs and discharges remained near series lows – a good sign of resilience so far in this tightening cycle. But private sector hours and manufacturing overtime hours have started to decline, especially manufacturing overtime hours. This may be a precursor to future weakness in employment.
The fall in overtime hours is consistent with an obvious slowing in US manufacturing activity. US activity measured by the S&P and ISM PMIs deteriorated in Dec. The ISM manufacturing PMI contracted again while the ISM services PMI showed services activity slowing quite notably, falling from 56.5 in Nov to 49.9 in Dec.
The FOMC minutes reflected the decision to slow the pace of the Dec rate hike to 50bps. The stronger hawkish tone of earlier in the year has been softened as policy approaches a restrictive level; ongoing increases are still appropriate, inflation starting to ease but need to see more evidence of progress, the labor market is still tight, but “a couple” of participants starting to see the risks to the inflation outlook becoming more balanced and the risks of over-tightening versus under-tightening as becoming more balanced.
The S&P global PMIs for Dec showed a further fall in global manufacturing momentum. While the contraction in the Eurozone and Japan stabilized in Dec, momentum in other parts of Asia slowed, and the US contraction gained momentum. The S&P global services contraction stabilized at a modest level as momentum improved across Europe, Japan, and the UK. Again, the US contraction in services gained momentum
Outlook for the week ahead
The focus this week will be on US CPI for Dec. Headline CPI is expected to moderate further to +6.5% from +7.1% in Nov. Monthly CPI is expected to remain at +0.1%. US core CPI is expected to slow to +5.7% from +6% in Nov with monthly core CPI for Dec at +0.3%. Other inflation reports; Aus Nov (monthly) CPI is expected to increase to +7% from +6.9%. China’s CPI for Dec is expected to remain low at +1.8%.
Germany and Eurozone production data for Nov will provide some scale for the weakness in the manufacturing PMIs. Last week, German factory orders declined by over 5% in Nov.
US Fed Chair Powell is to take part in a discussion panel on central bank independence.
This week, the US Treasury will auction and settle approx. $228bn in ST Bills, with a paydown of $1bn.
The US Treasury will also auction the 3 and 10-year Notes and the 30-year Bond this week – all will settle next week.
Approx $14bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $1bn in ST Bills will mature on the Fed balance sheet this week and will be redeemed/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
