by Kim | Sep 9, 2024
Key events this week – US CPI & PPI, ECB policy meeting
Recap from last week
The US labor market hiring continued to slow in Aug while the unemployment rate edged only slightly lower. Last week, US Fed Governor Waller noted that the risks to the labor market have shifted to the downside and aligned with Fed Chair Powell in indicating that it’s time for policy adjustments. His outlook was balanced;
While I don’t see the recent data pointing to a recession, I do see some downside risk to employment that I will be watching closely. But at this point, I believe there is substantial evidence that the economy retains the strength and momentum to keep growing, supported by an appropriate loosening of monetary policy. Source: Speech Fed Governor Waller, 6 Sep 2024
US nonfarm payrolls rose by +142k in Aug, coming in lower than expected, with further notable downward revisions for Jun and Jul. The 3-month average for NFP growth slowed to +116k in Aug, continuing to decelerate since Mar. Job openings dropped sharply at the end of Jul to 7.67m (expecting 8m), with Jun also revised lower. The job openings rate fell to 4.6%. Fed Governor Waller has previously quoted research indicating that a vacancy rate below the 4.5% threshold could result in a “significant increase in the unemployment rate” (source: Governor Waller, speech Jan 16, 2024).
The Fed’s Beige Book reported steady employment across regions, though some companies reduced hours or relied on attrition to manage employment levels. The Beige Book noted that reports of layoffs “remain rare”. The JOLTS layoff rate inched up to 1.1% in Jul but remains relatively low. A notable rise in the Challenger Job Cut Announcements in Aug signaled the potential for an increase in layoffs ahead. High-frequency initial claims, however, have eased, indicating layoffs are not yet a significant concern.
Despite weaker hiring, the US unemployment rate edged down from 4.25% to 4.22% in Aug but still sits above the FOMC’s projection of 4% by the end of 2024. The small fall in the unemployment rate was the result of a rebound in household employment growth while labor force growth slowed. Household employment growth is still especially low on an annual and monthly basis – and this month, employment growth was led by part-time employment, as full-time employment declined.
Uncertainty over the US growth outlook has increased recently, adding to concerns over the labor market. The Beige Book highlighted a weakening or stalling in growth conditions in the 3 months to Sep, but the slowdown seems to be marginal. The US ISM PMIs for Aug indicated offsetting effects of contracting manufacturing activity with a continued modest expansion in services. A more robust reading of the US Q3 growth run-rate is expected next week – but the latest Atlanta Fed GDP Nowcast has Q3 growth remaining around +2.1%.
There is little uncertainty now whether the FOMC will cut rates next week. But despite the lackluster labor report for Aug, markets pared back expectations over the size of the first rate cut, and are currently pricing in a 25bp cut next week (source: CME FedWatch).
Outlook for the week ahead
The focus this week will be on US inflation data.
Ahead of the FOMC meeting next week, the importance of the CPI report for Aug is to reinforce that inflation is on a sustainable path to 2%. Recent Fed speeches suggest that there is already growing confidence that inflation is on that path and that upside risks to inflation have diminished.
US headline CPI is expected to slow to +2.6% in Aug over the year, from +2.9% in Jul. The monthly pace of CPI growth is expected to stay at +0.2%. Core CPI is expected to be little changed at +3.2% over the year in Aug, versus +3.2% in Jul. Over the month, core CPI is expected to increase by +0.2% in Aug, versus +0.2% in Jul.
US headline PPI is expected to slow to +1.8% over the year in Aug, from +2.3% in Jul. Over the month, headline PPI is expected to increase slightly to +0.2% in Aug from +0.1% in Jul. Core PPI is expected to increase to +2.5% in Aug, from +2.4% in Jul. Over the month, core PPI is expected to increase to +0.2% in Aug from 0% in Jul.
Initial claims data is expected to stay little changed, rising slightly to +231k this week, from +227k last week. The trajectory of the initial and continuing claims has remained lower in recent weeks.
The US Presidential debate will be held early this week.
We are also in the blackout period for Fed speeches ahead of the FOMC meeting next week – however, Fed Vice Chair (Supervision) Barr will give a speech this week on the Basel III endgame.
The ECB will meet this week and is expected to cut its policy rate by a further 25bps. The ECB has maintained its data-dependent and meeting-by-meeting approach to determining the level and duration of its policy restriction. Inflation in Aug continued to ease with headline inflation slowing to +2.2% however, core inflation eased only slightly to +2.8%. Growth in Q2 across the Eurozone was lower than previously expected at +0.2%. Recent PMIs have highlighted the ongoing contraction in the manufacturing sector, especially in Germany, while services have expanded moderately, buoyed by the Olympics in France.
There will also be a wide range of China data out this week.
This week, the US Treasury will auction and settle approx. $426bn in ST Bills, with a net paydown of $59bn. The US Treasury will also auction the 3-year and 10-year Notes and 30-year Bonds – and will settle next week.
QT this week: Approx $2.5bn in ST Bills will mature on the Fed balance sheet 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 | Sep 2, 2024
Key events this week – US non-farm payrolls & labor market update, ISM surveys, US Fed Governor Waller speech, BoC policy meeting
Outlook for the week ahead
This week, the focus will be on the Aug US labor market update and its implications for the path of US interest rate policy.
The message from Fed Chair Powell at Jackson Hole was clear – “the time has come for policy to adjust” as upside inflation risks have diminished and downside risks to the labor market have increased. He expressed increased confidence that inflation is on a sustainable path back to 2% and last week’s PCE inflation data reinforced that view. On the labor market, the Fed Chair reaffirmed some of his comments from the last FOMC meeting. At the last FOMC press conference, the Fed Chair noted that “I would not like to see a material further cooling in the labor market”. Following the weaker-than-expected Jul labor market data, the Fed Chair was clear in his Jackson Hole remarks; “We do not seek or welcome further cooling in labor market conditions”. After Jackson Hole, markets expect rate cuts to begin at the Sep FOMC meeting. The labor market update for Aug could provide important input for determining the initial pace of that easing. So far, markets are pricing a 25bp cut, but still a chance for a 50bp cut (source: CME FedWatch).
This week’s data will offer a broader view of the US labor market, potentially clarifying if the notably weaker Jul report was an outlier. US non-farm payroll growth in Aug is expected to rebound to +164k from +114k in Jul. The unemployment rate is expected to fall back to 4.2% from 4.3% in Jul. Last month, temporary layoffs contributed to the increase in unemployment, along with faster growth in labor supply – both measures will be in focus this week. The average hours worked is expected to rebound to 34.3 in Aug from 34.2 in Jul. Job openings at the end of Jul are expected to continue to ease further to 8m, from 8.184m at the end of Jun. The layoff rate has remained near the series low while quits have also eased. Average hourly earnings are expected to rebound over the month to +0.3% and increase by +3.7% over the year. The weekly initial claims data has stabilized around +230k claims/week. Claims are expected to be +235k this week.
There will be several other releases providing insight into the broader US growth context. The ISM manufacturing PMI is expected to show manufacturing conditions remained weaker at 47.8 in Aug. The ISM services PMI is expected to show a slower pace of expansion at 50.9 in Aug from 51.4 in Jul. US factory orders are expected to rebound by +4.5% in Jul from -3.9% in Jun.
The broader US growth context has remained positive. Last week, the Q2 GDP was revised higher in the second estimate from +2.8% to +3% annualized due in part to higher personal spending. With data still limited for the current quarter, the latest Atlanta Fed GDP Nowcast has the growth run-rate easing slightly to +2.5% so far in Q3.
Fed Governor Waller is scheduled to speak on Friday after the US payrolls and labor market data, providing an update on the Economic Outlook. NY Fed President Williams is also expected to speak on Friday. These will be important speeches before the blackout period next week, ahead of the next FOMC meeting on 17-18 Sep.
The Bank of Canada meets this week and is expected to cut rates by a further 25bps. The BoC has already cut rates at its last two meetings. The Canadian labour market update for Aug will be released at the end of the week. Employment growth is expected to rebound to +25k from -2.8k in Jul. However, the unemployment rate is expected to edge higher to 6.5% in Aug from 6.4% in Jul.
Australian GDP growth for Q2 is expected to lift slightly to +0.2% from +0.1% in Q1. At the last RBA meeting, Governor Bullock noted that growth forecasts had been upgraded due to public demand and a lift in household spending as real wages increased. Data revisions indicated that spending may not have been as weak as previously thought. The RBA Governor will give the annual speech to the Anika Foundation this week – and this usually provides an important update on economic conditions.
Finally, the broader suite of S&P Global PMIs will be released this week for Aug.
This week, the US Treasury will auction and settle approx. $681bn in ST Bills, Notes, and Bonds raising approx. $100bn in new money.
QT this week: Approx $3bn in ST Bills will mature on the Fed balance sheet 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 | Aug 19, 2024
Key events this week – Jackson Hole Symposium, FOMC, RBA, & ECB minutes, Japan & Canada CPI, S&P prelim PMIs Aug
Recap from last week
Data last week provided important inputs for the FOMC as it considers the case for rate cuts. At the last meeting, Fed Chair Powell outlined his criteria for a rate cut: whether the totality of the data, the evolving outlook, and the balance of risks support growing confidence in controlling inflation while maintaining a solid labor market. We expect this framework to be discussed at the Jackson Hole Symposium this week. For now, inflation is easing, and early, limited Q3 data suggests that the growth rate at the start of the quarter slowed to around 2%, driven by weakness in housing investment and manufacturing.
The latest CPI was in line with expectations and likely added to confidence that inflation is continuing to move towards the 2% target. The CPI is not the Fed-preferred measure, but together with the PPI provides a guide for the PCE inflation measure (due next week). Headline CPI eased to +2.9% in Jul, while core CPI also eased to +3.2%. While the monthly rates increased from lower levels, they remain consistent with lower inflation readings. Core goods prices continued to decline, while core services inflation also eased. Although core services CPI remains elevated at +4.9%, the more recent 3-month and 6-month annualized rates are well below that level, indicating more recent progress in reducing inflation. The PPI for Jul came in lower than expected.
Data on the growth of the US economy remained mixed, overall highlighting that growth likely slowed in Jul. The exception was retail sales, which recorded stronger-than-expected growth in Jul. This was partly due to a revised lower Jun result and a rebound from the fall in motor vehicle sales in Jun. But even excluding motor vehicles, retail sales growth remained moderate at around +0.4% over the month in nominal terms. However, housing investment and manufacturing data reflected further weakness in Jul. At the end of the week, the Atlanta Fed GDP Nowcast, based on limited data, had the early Q3 growth run rate slowing to +2%. The FOMC is likely to be sensitive to the risk of slowing growth concerning its full employment mandate. For now, US initial claims data continued to improve with claims easing to +227k over the week from a peak of +250k two weeks ago. Even the elevated continuing claims have started to recede.
The RBNZ cut rates by 25bps for the first time in this cycle. The Committee cited rising confidence about inflation returning to the target band and a concern regarding a “marked weakening in economic conditions over the last few months” as the key reasons behind the decision. New guidance indicated that further easing was likely, but that the pace of that easing was “dependent on the path of price setting behaviour” now that inflation is close to the target band.
There was a lot to unpack in the Aus labour market report for Jul. The unemployment rate increased more notably to 4.22% in Jul – but still below the year-end projection of 4.3%. Mitigating that negative point was the stronger (and accelerating) growth in employed persons – which remains above pre-pandemic levels of growth. This month, the participation rate reached another new all-time high, contributing to the faster increase in the size of the labour force. How this increase in labor supply is absorbed over the next few months—whether through further employment gains or rising unemployment—will be crucial for the RBA as it navigates the ‘narrow path’.
Outlook for the week ahead
Central bank policy will be in focus this week with the annual Jackson Hole Symposium. Inflation, central bank minutes, and the latest Aug prelim PMIs will also be released.
The Jackson Hole Symposium will commence on Thur this week and the focus will be on US Fed Chair Powell’s speech on Fri. This should provide further shape around recent data, the evolving outlook, and the balance of risks as the FOMC prepares to start cutting rates. The extent of the rate-cutting cycle may not be made clear at this meeting as the Fed waits for further payroll and unemployment data before the next meeting in Sept.
The FOMC, RBA, and ECB minutes will all be released this week.
Inflation data for Canada and Japan will be released this week. Canadian CPI is expected to continue to ease in Jul with the headline rate slowing to +2.5% over the year. The BoC core trimmed mean rate is also expected to slow further to +2.8% over the year. At its last meeting, the BoC noted that further rate cuts could be expected if inflation continues to ease in line with expectations.
The Japanese National CPI for Jul is expected to increase slightly. The BoJ preferred measure of core CPI ex fresh food is expected to increase from +2.6% in Jun to +2.7% in Jul. Some firming in inflation could be consistent with the rebound in Japanese GDP growth in Q2 of +0.8% over the quarter from a fall of -0.6% in Q1. The improvement was led by a solid increase in private consumption spending after falls in the four quarters prior.
Finally, the latest prelim PMIs for Aug will be released for the major economies. This will provide a further update on the pace of activity through Q3.
The US Democratic Convention will also take place this week. Vice President Harris will formally become the Democratic nominee for President.
This week, the US Treasury will auction and settle approx. $466bn in ST Bills, raising approx. $36bn in new money. The US Treasury will also auction the 20-year Bond and 30-year TIPs this week – both will settle at the end of the month.
QT this week: Approx $11.5bn in ST Bills will mature on the Fed balance sheet 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
We will be taking a short break next week w/c 26 Aug and will return with the next installment of the Macro Outlook on w/c 2 Sep.
by Kim | Aug 12, 2024
Key events this week – US CPI, PPI, & retail sales, UK CPI, RBNZ meeting, Aus labour market, GDP; Eurozone, UK, & Japan
Recap from last week
The week began with heightened fears of a slowdown in US growth amid significant market turbulence. Despite a light week for major data releases, the available data still managed to ease growth concerns.
The US ISM services PMI did rebound in Jul, and the improvement was enough to calm the narrative that the US economy was suddenly slowing. The rebound in Jul was moderate at 51.4 with several bright spots including more widespread growth in new orders, output, and employment.
US initial claims data also managed to push back on concerns over US labor market softness. Initial claims came in lower than expected at +233k – and back in line with the 12-week average.
Growth in mortgage applications rebounded more notably (+6.9% over the week) as mortgage rates continued to fall. The rebound in applications was led by refinance applications for now, however, it will be important to track the effect of lower rates on a recovery in housing activity.
The latest US Senior Loan Officer Opinion Survey also hinted that lending standards may not have tightened to the same degree in Q2 compared to Q1;
While banks, on balance, reported having tightened lending standards further for most loan categories in the second quarter, the net shares of banks that reported having tightened lending standards are lower than in the first quarter across almost all loan categories. Source: SLOOS Q2
A speech by BoJ Deputy Governor Uchida helped to calm markets after the BoJ had increased its policy rates and guided further possible rate increases. This was an important speech for signaling on the near-term path of Japanese rates given the volatility in markets, especially in Japan. He summed up by distinguishing the current path of the BoJ and other central banks;
“…in contrast to the process of policy interest rate hikes in Europe and the United States, Japan’s economy is not in a situation where the Bank may fall behind the curve if it does not raise the policy interest rate at a certain pace. Therefore, the Bank will not raise its policy interest rate when financial and capital markets are unstable.” Source: Speech to Local leaders in Hakodate, 7 Aug 2024
The RBA kept policy settings unchanged as expected. The Board noted the increased risk that inflation in Aus will take too long to return to target. The latest CPI data “demonstrated that inflation is proving persistent” and growth expectations were revised higher. In a speech later in the week, Governor Bullock confirmed that the Board’s expectations for when inflation will come back to target have been pushed out. While the Board did discuss a rate hike at this meeting, the decision to stay on hold aligned more strongly with its dual mandate objectives as it “steers a narrow path” between keeping employment growing and inflation slowing”.
S&P Global PMIs indicated that the current expansion slowed at the start of Q3. This was led by a slowdown in global manufacturing activity as the global manufacturing PMI slipped back into contraction and the manufacturing new orders index fell for the first time in six months. This was only partly offset by services output which resumed expanding at a faster pace in Jul, after a brief pause in Jun.
Outlook for the week ahead
The focus this week will likely remain on US inflation and the US growth narrative ahead of the Jackson Hole symposium next week.
The FOMC recently noted that inflation readings don’t need to be ‘better’, and that it just wants more readings around this level to increase its confidence that inflation is slowing. US headline CPI for Jul is expected to be unchanged at +3% over the year, from +3% in Jun. Over the month, inflation is expected to increase by +0.2%, up from -0.1% in Jun. Core CPI is expected to ease to +3.2% over the year, down from +3.3% in Jun. Over the month core CPI is expected to increase by +0.2%, up from +0.1% in Jun.
This week the US PPI report for Jul will be released before the CPI report. The US headline PPI for Jul is expected to be little changed at +2.6% versus +2.6% in Jun. Over the month, PPI is expected to increase by +0.2% – the same pace as Jun. Core PPI is expected to increase by +3% over the year in Jul, while monthly core PPI is expected to slow to +0.2% in Jul from +0.4% in Jun.
The broader US growth context will be in focus this week with the first comprehensive update on growth at the start of Q3 across consumption, output, and housing activity in Jul. US retail sales are expected to increase by +0.4% in Jul, after a 0% change in Jun. Despite the flat growth of headline retail sales in Jun, the increase in the retail control group sales (which feeds into GDP consumption) was notably stronger at +0.9%. This measure is expected to ease in Jul.
US industrial production is expected to ease in Jul. Output is expected to fall by -0.2%, slowing from +0.6% in Jun. This would be broadly in line with weaker output readings across US manufacturing PMIs. The first US regional manufacturing surveys for Aug will provide a guide on momentum through Q3.
The first round of housing data for Jul will be released. Given the falls in mortgage rates, it will be important to gauge the shift in the NAHB homebuilder sentiment index this week – which is expected to be unchanged at 42. New housing permits for Jul are still expected to ease to an annualized pace of 1.43m, from 1.454m in Jun. New housing starts are also expected to ease to an annualized pace of 1.34m in Jul from 1.353m in Jun.
Initial claims are expected to stay low at +232k for the prior week.
The calendar of Fed speeches will be light this week. A more substantial round of signaling on the path of US rates is expected next week at the annual Jackson Hole Symposium on Central Banking (22-24 Aug).
The RBNZ is expected to keep policy settings unchanged, but this could be another finely balanced decision. Last time, the RBNZ noted that policy restraint will be tempered over time as inflation eases further. In Q2, measures of domestically led inflation improved but remained elevated at +5.4%. The Q2 employment report last week could concern policymakers – employment growth was better than expected, but the unemployment rate increased from 4.3% to 4.6% (just below the expectation of a 4.7% unemployment rate).
Finally, the Aus labour market data for Jul will be important for the RBA. The net change in employment is expected to slow to +20k, the participation rate is expected to be unchanged at 66.9%, and the unemployment rate is expected to be unchanged at 4.1%. The Wage Price Index for Q2 will also be released and is expected to increase slightly over the quarter by +0.9%, up from +0.8% in Q1.
This week, the US Treasury will auction and settle approx. $591bn in ST Bills, Notes, and Bonds, raising approx. $55bn in new money.
QT this week: Approx $38bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $15bn in Notes & Bonds will be redeemed 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 | Aug 5, 2024
Key events this week – US ISM services PMI, RBA monetary policy meeting
Recap from last week
The FOMC kept policy settings unchanged, however, noted that it is getting closer to the point at which it will be appropriate to reduce the policy rate.
“…that the broad sense of the Committee is that we’re getting closer to the point at which it will be appropriate to reduce our policy rate, but that we’re not quite at that point yet.” US Fed Chair Powell Q&A
The Fed Chair went on to outline his test for a rate cut, which, if met, could see a cut on the table as soon as the next meeting in Sept.
The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market.
The policy decision and statement shifted back to reflect an equal balance between the dual mandate goals. This step mirrored the FOMC noting that risks around the mandates have come back into balance. The last couple of readings on inflation have added to confidence and the Fed is looking for more good data. The Fed Chair noted that the “quality” of this year’s disinflation was higher but emphasized that it is based on one quarter of data. More data is needed to be confident that the path to 2% inflation is solid. However, confidence is growing across a broader range of measures.
On the labor market, the Fed Chair noted that “what the data broadly show in the labor market is an ongoing, gradual normalization of labor market conditions”.
It’s a rough balance, but it does feel like, again, the labor market feels like it’s in a place where it’s just a process of ongoing normalization, 4.1 percent unemployment is still historically low and we’ll just have to see what the data show us. US Fed Chair Powell Q&A
Would the FOMC see the weaker-than-expected jobs report for July as still within the realm of “ongoing normalization”, or as an “unexpected weakening” in conditions? Non-farm payroll growth of +114k in Jul was notably slower than the average pace for the first half of this year. This report went against the recent trend of payroll reports that have been ‘better than expected’ when released, only to be revised lower in subsequent months. There has been a cumulative -279k in payroll revisions since Jan 2024. The question is whether the weaker Jul result will also be revised lower.
Labor demand continued to cool, and the unemployment rate increased to 4.25% as growth in the labor supply increased. Temporary layoffs contributed to this rise in unemployment (possibly reversing next month), while firms have not moved to significant job shedding, as shown by the equal series low JOLTS layoff rate in Jun. The employment-to-population ratio also increased to a post-pandemic high of 80.9% among the core working-age group in Jul, surpassing the pre-pandemic level. Despite some positive labor statistics, the unemployment rate exceeding the Fed’s year-end projection of 4.1% signals a risk of a broader negative feedback loop developing if labor demand continues to slow.
At the time of writing, the CME FedWatch tool has markets pricing in a 50bps rate cut in Sep.
The Bank of Japan took further steps towards normalizing its policy settings. The BoJ increased its policy rate to ‘around 0.25%’ in a 7-2 majority decision. Guidance indicated that further increases in the policy rate could be expected if the outlook presented in the July Outlook Report was to be realized. The Board also decided, by a unanimous vote, on a plan to reduce the amount of its monthly outright purchases of JGBs by about 400bn yen each calendar quarter in principle – see details here.
The Bank of England also cut rates for the first time in this part of the cycle in a finely balanced 5-4 decision. The BoE noted that it was appropriate to begin the process of reducing policy restrictiveness as risks of persistent inflation have moderated, and the impact of external shocks has abated.
Outlook for the week ahead
There will be relatively few notable data releases this week.
The US ISM services PMI will be released this week. This is expected to rebound from a slight contraction in Jun of 48.8 to a modest expansion of 51 in Jul. Last week, the ISM manufacturing PMI for Jul came in worse than expected at 46.8 indicating a deterioration in manufacturing conditions. The more notable weakness in the ISM manufacturing employment index was not confirmed by the payroll data.
We will continue to watch the US initial claims data. Claims are expected to stay around +250k for last week.
The US Federal Reserve’s Q2 Senior Loan Officer survey will be released this week. At this stage, there are no Fed speeches scheduled on the US Federal Reserve calendar. However, with some turbulence in the markets at the time of writing, this could change.
The RBA will meet this week and is expected to keep policy settings unchanged. The RBA cash rate of 4.35% remains well below the policy rate of other key central banks. The Q2 inflation report provided little evidence supporting the case for the RBA to hike rates, however, underlying inflation remained elevated, and this likely supports the case to stay on hold. Core trimmed mean inflation eased only slightly from +3.95% in Q1 to +3.9% in Q2. RBA Governor Bullock will also speak later in the week.
This week, the US Treasury will auction and settle approx. $502bn in ST Bills, raising approx. $47bn in new money. The US Treasury will also auction the 3-year and 10-year Notes and the 30-year Bond this week – and will settle next week.
QT this week: Approx $16bn in ST Bills will mature on the Fed balance sheet 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
