by Kim | Jun 24, 2024
Key events this week – US PCE inflation, Aus & Canada CPI
Recap from last week
US spending, housing, and output data for May pointed to solid growth continuing through Q2, providing important context for the policy outlook as the FOMC considers when rate cuts will come into view.
The Atlanta Fed GDP Nowcast for Q2 dipped slightly from +3.2% to +3%, with consumption and housing data offsetting gains in industrial production. US retail sales growth for May of +0.1% was slower than expectations for a modest +0.3% increase. The fall in gasoline sales of 2.2% (related to a fall in gasoline prices of 3.6% in May) was the main driver of slower growth. Apr was revised lower from 0% growth to a -0.2% decline. The overall lacklustre growth in real terms highlights the normalizing trend of retail sales over the last two years.
Housing data was weaker in May. Falls in single-family permits and starts, which had been more buoyant, are now contributing to the slowing trend. Home builder sentiment also weakened in Jun. Existing home sales continued to drift lower.
US production/output was a bright spot in May. Manufacturing output growth accelerated, and the stronger result was evident across both durable and non-durable goods output.
The US prelim PMIs for Jun pointed to a continued improvement in growth momentum through the end of Q2. US services and manufacturing sectors continued to expand in Jun, contrasting with declines in other G4 economies.
Central bank decisions continued to diverge last week. The RBA stayed on hold, citing concerns over persistent inflation and reinforcing the need to ‘remain vigilant to the upside risks to inflation’. The Jun quarterly CPI will be important in ‘giving a much more comprehensive view of what’s going on’. The case for a rate hike was considered at this meeting, but a hold was deemed the most appropriate policy course.
The BoE kept rates on hold but signalled that Aug could be live for consideration of a rate cut.
As part of the August forecast round, members of the Committee would consider all of the information available and how this affected the assessment that the risks from inflation persistence were receding. On that basis, the Committee would keep under review for how long Bank Rate should be maintained at its current level. Source; BoE Minutes
Deliberations showed that a growing number of MPC members considered that UK inflation was on a downward trajectory and, despite still elevated services inflation, the policy decision at this meeting had become ‘finely balanced’.
The SNB cut rates for the second time in this cycle.
Outlook for the week ahead
This week’s US inflation data will provide a crucial update for the FOMC’s policy outlook. While US growth remains solid and the labor market rebalances, the FOMC needs consistent evidence that inflation is sustainably moving towards the 2% target before it considers initiating the rate-cutting cycle.
This week, the FOMC preferred PCE inflation data for May will provide a further reading on the progress of disinflation.
US PCE inflation is expected to slow to +2.6% in May, from +2.7% in Apr. This would be in line with the latest FOMC projection for the median PCE inflation rate of +2.6% over 2024. The monthly headline rate is expected to slow to 0% in May from +0.3% in Apr.
Core PCE inflation is expected to slow to +2.6% in May from +2.8% in Apr – this would be below the projection of +2.8% for core PCE inflation over 2024. The monthly core PCE inflation rate is also expected to slow to +0.1% in May from +0.2% in Apr.
There will be further important US consumption, housing, and output data to update the view of Q2 growth.
Personal spending for May is expected to increase by +0.3%, up from +0.2% in Apr. Personal income is expected to increase by +0.4% in May, up from +0.3% in Apr.
New home sales are expected to increase slightly to 0.65m annualized in May, up from 0.634m in Apr. Pending home sales will provide a view of the pipeline of housing sales for May.
US Q2 GDP (third estimate) is expected to be confirmed at +1.3% annualized.
Durable goods orders are expected to increase by +0.3% in May after increasing by +0.6% in Apr.
We are monitoring initial jobless claims as the 4-week average continues to rise. Last week, the seasonally adjusted initial claims series remained elevated at +238k, and are expected to be +240k this week.
Finally, there will be a range of Fed speeches this week. Fed Governor Waller will provide opening remarks on Monday (not clear that he’ll talk about the economy or monetary policy), and Governor Cook will speak on the economic outlook at the Economic Club of NY on Tuesday.
The Aus monthly CPI series for May will be released this week and will be important given the concerns of persistent inflation. Headline inflation is expected to be +3.8% in May, up from +3.6% in Apr. RBA Governor Bullock noted that the monthly series is useful in providing an update on the momentum of inflation, but doesn’t yet provide the full picture of inflation.
The Canadian CPI for May is expected to continue easing. Headline inflation is expected to slow to +2.6% in May from +2.7% in Apr. The important trimmed mean is also expected to slow further to +2.8% in May, from +2.9% in Apr. The BoC started cutting rates at its meeting in Jun citing continued evidence that underlying inflation is easing, and policy no longer needs to be as restrictive.
This week, the US Treasury will auction and settle approx. $645bn in ST Bills, Notes, and Bonds, raising approx. $113bn in new money.
QT this week: Approx $10.5bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx. $16bn in Notes & Bonds will be redeemed and rolled 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 | Jun 17, 2024
Key events this week – US retail sales, central banks; BoE, RBA, and SNB, inflation; UK, Japan, and Euro Area, S&P prelim PMI’s Jun
Recap from last week
The FOMC kept monetary policy settings unchanged, emphasizing the importance of balancing its dual mandate. Fed chair Powell noted modest progress on inflation, with the latest May CPI report showing improvement. However, the FOMC needs more positive data before loosening policy.
And we do see today’s report as progress and as, you know, building confidence. But we don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time.
The Committee delayed rate cuts, projecting one to two cuts this year, down from the Mar estimate of one to three. Disinflation progress is expected to be slow, with higher projected PCE inflation rates reflecting more conservative forecasts:
We’re assuming, you know, good but not great numbers.
The latest May CPI & PPI results suggest a softer reading in the FOMC preferred measure of PCE price inflation for May (due in the following week).
I think, let me say that we welcome today’s reading and then hope for more like that.
U.S. growth is still expected to slow back to trend over the remainder of the year, while the unemployment rate is expected to remain unchanged at the current level of 4% for the rest of the year.
We kind of see what we wanted to see, which was gradual cooling and demand, gradual rebalancing in the labor market while we’re continuing to make progress on inflation. So, we’re getting good results here.
The updated projections raised questions about the timing of rate cuts. However, in the absence of more information, the FOMC is managing its dual mandate cautiously, prepared to maintain the current federal funds rate if inflation persists but ready to cut rates if the labor market unexpectedly weakens or inflation falls rapidly.
The BoJ kept policy settings on hold. It did signal that at the next monetary policy meeting the Policy Board will decide on “a detailed plan for the reduction of its purchase amount (of JGB’s) during the next one to two years or so”.
Outlook for the week ahead
It will be a short US week with the Juneteenth Holiday on 19 June.
The focus this week will be on US growth data, central bank decisions, and global inflation reports.
There will be a range of US spending, production, and housing data providing a further update on the progress of US GDP growth in Q2. The main focus in the US will be retail sales for May. After the softer retail growth in Apr of 0%, retail sales in May are expected to increase modestly by +0.3%. US industrial production is expected to increase by +0.2% in May after 0% growth in Apr. US housing starts for May are expected to increase by 1.37m (annualized), up from 1.36m in Apr. Building permits are expected to increase slightly to 1.45m annualized in May, from 1.44m in Apr. Existing home sales are expected to ease slightly to 4.08m annualized in May, down from 4.14m in Apr.
The US initial claims will be an important indicator to watch. Last week, the NSA initial claims series increased in line with seasonal patterns, however, there was also a notable increase of +242k in the seasonally adjusted (SA) initial claims. This is still relatively low, but the 4-week average has edged higher and this will be important to watch. Initial claims (SA) for the week ending 15 Jun are expected to increase by +235k.
There will be several Fed speeches throughout the week.
There will be a number of central bank meetings this week. The RBA will meet early in the week and policy settings are expected to be unchanged. At the last meeting, concerns over persistent inflation were noted. Guidance had indicated that it would be ‘some time yet’ before inflation was sustainably in the target range. The path of interest rates remains uncertain, with the Board “not ruling anything in or out”. The latest monthly CPI series for Apr indicated that progress on inflation had remained stalled. Last week, the labour market data for May was positive, as employment growth remained solid for the month, and the unemployment rate edged slightly lower as expected.
The BoE will meet this week and policy settings are expected to be unchanged. The latest update on inflation for May will be released the day before the meeting. The prior inflation reading had eased, but not by as much as expected. Headline inflation is expected to slow to +2% in May from +2.3% in Apr, while core CPI is expected to ease further from +3.9% in Apr to +3.5% in May. Guidance from the prior decision noted that “policy needs to stay restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates”.
The Swiss National Bank is expected to decide on its policy rate this week.
Other inflation reports this week include the final Euro Area CPI for May. Headline inflation is expected to be confirmed at +2.6% and core CPI is expected to be confirmed at +2.9%.
Japanese National headline CPI for May is expected to be little changed at +2.5%. The BoJ preferred measure of core inflation excluding fresh food is expected to increase to +2.6% in May from +2.2% in Apr.
Finally, the latest prelim PMIs for Jun will be released later in the week rounding out the view of Q2 private sector growth momentum.
This week, the US Treasury will auction and settle approx. $519bn in ST Bills, Notes, and Bonds, raising approx. $34bn in new money. This includes the 3-year and 10-year Notes, and 30-year Bonds auctioned last week, which settle this week. Also, $34bn in 5-year TIPS and 20-year Bonds will be auctioned this week – to settle at the end of the month.
QT this week: Approx $4.7bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx. $9bn in Notes & Bonds will be redeemed and rolled 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 | Jun 10, 2024
Key events this week – FOMC & BoJ meeting this week, US CPI
Recap from last week
Stronger than expected US payrolls for May will likely continue to support the FOMC in keeping policy rates unchanged at its meeting this week.
US non-farm payroll growth in May was +272k – significantly higher than the +185k expectation. Revisions to the prior two months were minor at -15k. Despite slowing from recent peaks, the annual rate of payroll growth of +1.8% is still sitting above the 5-year pre-pandemic average of +1.7%. However, the household survey of the labor market remained subdued in May, with employment growth continuing to slow and the unemployment rate, though historically low, continuing to drift higher. The recent dynamic from the JOLTS survey was unchanged; labor demand has eased while layoffs and discharges have stayed at a series low level of 1%. Notably, the job openings rate has fallen sharply over the past two months from 5.3% in February to 4.8% in April, below the 12-month average of 5.3%. This, along with slower employment growth and a modest rise in the unemployment rate, suggests some cooling in labor market conditions, aligning with the FOMC’s goal of balancing labor demand and supply. That said, average hourly earnings for May were higher than expected at +0.4% for the month, with the annual rate firming at around +4.1%. Earnings growth appears to have stalled around this rate over the last several months.
US data was mostly positive last week, despite mixed results from the US ISM surveys. The latest estimate of US Q2 GDP growth from the Atalanta Fed GDPNowcast increased to +3.1% by the end of the week, from a run rate of +1.8% at the start of the week.
The ECB and BoC both cut rates as expected last week. The ECB reduced its benchmark rates by 25bps while maintaining its data-dependent guidance.
“Then we decided to cut, and we did so because overall our confidence in the path ahead, because we have to be forward-looking, has been increasing over the last months.” Source: Christine Lagarde, ECB Press Conference, 6 Jun
The Boc also reduced its benchmark rate by 25bps. The BoC noted evidence that underlying inflation is easing, and that policy no longer needs to be as restrictive. Recent data has increased the BoC’s confidence that inflation will continue to move towards the 2% target. That said, there was still caution around high services inflation. The BoC maintained its data-dependent guidance but did suggest that it “would be reasonable to expect further cuts” if inflation continued to ease (source: Bank of Canada, Opening Statement)
Outlook for the week ahead
It’s the second week of important monetary policy decisions – and this week the focus will be on the FOMC and BoJ meetings. The latest US CPI data for May will be out on the same day as the FOMC decision.
The FOMC is expected to keep policy settings unchanged. The FOMC has previously outlined two broad scenarios that could lead to rate cuts. The first scenario involves an unexpected weakening of the labor market. Last week’s payroll data for May exceeded expectations, indicating that while the labor market is showing some signs of cooling, it remains in line with expectations. The second scenario involves gaining greater confidence that inflation is moving towards 2% and adjusting policy rates to a lower inflation environment. After stalling in Q1, the April inflation data has provided some relief, suggesting that progress on disinflation may have resumed. However, the FOMC is likely to maintain its position that it needs more positive inflation data to be confident that inflation is moving towards its 2% target before cutting rates. The latest round of economic projections will be released at this meeting, with changes to interest rate projections through 2024 being the most closely watched. At the time of writing, markets are pricing one rate cut for 2024.
Headline US CPI for May is expected to be little changed at +3.4% over the year but is expected to slow to +0.1% over the month (versus +0.3% in Apr). Core inflation is expected to ease slightly to +3.5% in May from +3.6% in Apr while monthly core inflation is expected to be unchanged at +0.3% in May from +0.3% in Apr.
The US annual headline PPI rate is expected to remain at +2.2% in May, versus +2.2% in Apr. The monthly headline PPI rate is expected to ease to +0.1% in May, from +0.5% in Apr. Core PPI is expected to ease to +2.3% over the year in May from +2.4% in Apr, while the monthly core rate is expected to ease to +0.3% from +0.5% in Apr.
The BoJ will meet this week and policy settings are expected to be unchanged. However, there is some expectation that the BoJ may provide signaling on plans to further normalize monetary policy settings, namely a reduction in its bond purchases.
The Aus labour market data for May will be released this week and will be an important input for the RBA meeting next week. Net employment growth is expected to be +30k, down slightly from +38k in Apr, participation is expected to be unchanged, and the unemployment rate is expected to ease back to 4% from 4.1% in Apr.
This week, the US Treasury will auction and settle approx. $565bn in ST Bills, Notes, and Bonds, raising approx. $49.5bn in new money.
QT this week: Approx $4.8bn 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 | Jun 3, 2024
Key events this week – ECB & BoC meetings, US non-farm payrolls & ISM surveys, Aus GDP Q1, Global S&P PMIs
Recap from last week
The US PCE inflation print for Apr was in line with expectations and most likely qualifies as ‘heading back in the right direction’. Overall, this is likely to be seen as progress, albeit slow, and the FOMC will still need to see further easing across successive reports to be confident that inflation is moving sustainably towards the 2% target. Core PCE inflation slowed to +0.2% over the month from +0.3% in Mar. The annual core PCE inflation rate eased slightly to +2.75% in Apr from +2.81% in Mar, still above the current median FOMC projection of +2.6% over 2024. The 3-month annualized core PCE rate is still running at +3.5% but did slow from +4.4% in Mar. Services ex-energy & housing inflation has been a measure often cited by the FOMC as a gauge of the direction of underlying inflation. This measure eased in Apr to +0.32% from +0.4% in Mar, while the annual rate increased from +3.4% to +3.5%. The monthly trimmed mean eased further in Apr to +0.23% from +0.27% in Mar – and this monthly rate is almost back in line with the slower pace of H2 2023. The annual trimmed mean continued to slow to +2.9% from +3% in Mar.
Other US data from last week led to a lower estimate for GDP growth in Q2 (albeit still at an elevated pace). By the end of the week, the Atlanta Fed GDPNow cast for Q2 had slowed to +2.7% from +3.5% at the start of the week. Lower-than-expected personal spending growth for Apr was a key contributor. The ‘resilient consumer’ narrative came further into question as the second reading for Q1 GDP growth was also revised lower than expected to +1.3% – due mostly to lower personal consumption expenditures.
Other CPI reports last week suggested firm inflation is persisting. The Euro Area prelim CPI for May came in higher across both headline and core measures. This week, the ECB is broadly expected to cut its benchmark interest rates by 25bps. The firmer inflation print, and improving growth outlook may keep guidance for follow-up rate cuts somewhat opaque.
The monthly Aus inflation print for Apr indicated that progress on disinflation stalled. This result is likely to keep inflation concerns elevated at the RBA. However, the latest minutes of the RBA meeting noted that “members judged that it remained reasonable to look through short-term variation in inflation to avoid excessive fine-tuning”. The Board is balancing the task of staying on a ‘credible path’ to the midpoint of the inflation target with maintaining employment growth.
Outlook for the week ahead
This week marks the beginning of several weeks of important central bank meetings. Recently, central bank guidance (among developed markets) has ranged from rates staying higher at these peaks (holding for longer) to rate cuts starting to come into view to calibrate with a lower inflation environment and to achieve a soft landing.
The first of these developed market central banks are expected to cut rates this week – and the focus will shift to the guidance and outlook for further easing. The BoC is expected to cut its policy rate this week by 25bps (possible). BoC guidance had noted that rates had peaked, and it was waiting for more progress on inflation. In recent months, slower inflation prints have been more favorable, while growth improved in Q1 to +0.4% (after stalling through the second half of 2023). The next update on the Canadian labour market for May will be at the end of the week – and the unemployment rate is expected to remain elevated at around 6.1%.
The ECB is broadly expected to cut its key policy rates by 25bps this week. The ECB has been more consistent in its signalling of a cut at this Jun meeting. As noted already, the firmer inflation reading in May, and a more positive growth environment could make guidance less clear on the path of follow-up rate cuts.
The FOMC meets next week – and it currently sits in the camp of staying on hold for longer. Inflation data from last week will not likely change that guidance. The US labor market data this week will be important for how the FOMC sees the path of policy – continued resilient labor conditions are likely to support the FOMC in staying on hold for longer. Non-farm payroll growth is expected to remain at the more moderate pace of +185k in May (from +175k in Apr). The unemployment rate is expected to be unchanged at 3.9%. Metrics of labor demand, such as Job Openings are expected to continue to ease with openings falling slightly to 8.35m in Apr.
Other US data this week includes the ISM surveys for May. These will be instructive in confirming the recent improvement in the S&P PMI surveys for May. Manufacturing conditions are expected to stay around the neutral level, while services are expected to shift back into slight expansion.
This is also the blackout period for Fed speeches ahead of the FOMC meeting next week.
Aus Q1 GDP growth is expected to be little changed at +0.2% over the quarter and to slow to +1.2% over the year (from +1.5% in Q4).
The broader global S&P PMI’s for May will be released this week.
This week, the US Treasury will auction and settle approx. $400bn in ST Bills, with a net paydown of approx. $17bn.
QT this week: Approx $2.4bn in ST Bills will mature on the Fed balance sheet and will be reinvested. The lower cap of $25bn for monthly Treasury redemptions comes into effect 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
by Kim | May 27, 2024
Key events this week – US PCE inflation, CPI inflation; Euro Area, Aus (monthly), and Tokyo
Recap from last week
A key theme from the FOMC minutes was the lack of further progress on inflation during Q1. While policy rates were seen as sufficiently restrictive, it was likely going to take longer to gain confidence that inflation was moving toward the 2% target. The Committee did not expect that it would be appropriate to reduce rates until it had gained that greater confidence. The FOMC would be prepared to reduce policy restraint if there was an unexpected weakening in the labor market, and alternatively, ‘various participants’ were prepared to tighten policy under certain circumstances. Fed Chair Powell had already addressed the possibility of tightening in the short-term – that a hike was “unlikely to be the next policy rate move” and that the conditions for a hike were notably higher (needing persuasive evidence that policy is not restrictive enough). Overall, “participants assessed that monetary policy was well positioned” to respond to evolving economic conditions.
Since that meeting, the Apr CPI has reignited some hope that inflation has resumed its slowing trend. In a speech, Fed Vice Chair Jefferson noted that “the better reading for April is encouraging”. In a separate speech, Fed Governor Waller gave the April CPI report a “C+” – “not a fail, but not a stellar result either”. He cautioned that progress was so modest, that he still needed to see several more months of “good data” – that which “doesn’t require two decimal places”. The Fed-preferred PCE measure of inflation for Apr will be released this week – and is expected to follow the modest easing trend of the Apr CPI report.
Housing activity in the US remained subdued as existing home sales came in less than expected for Apr, while the Mar result was revised higher. Existing home sales remain 7.5% above the pandemic low recorded in Oct 2023. Inventory continued to increase in Apr. New home sales were also lower than expected in Apr.
The preliminary S&P PMI surveys indicated that private sector activity across the major developed market economies continued to improve in May. This was led by manufacturing activity and output growth in Japan, the Eurozone (slower contraction), the UK, and the US. The more moderate pace of services output growth was maintained in May – led by a notable acceleration in services output in the US. This will likely be positive for Q2 growth – especially in the US.
Headline UK inflation came down notably as expected. However, UK core CPI slowed less than expected to +3.9% as services inflation eased only slightly to an elevated +5.9%. This will likely remain a concern for the BoE. Headline inflation in Canada eased in line with expectations, with a more broad-based slowdown this month – led by food, services, and durable goods. Lower BoC measures of core inflation were encouraging, with the trimmed mean easing to +2.9%. Annual inflation eased in Japan. The main BoJ measure of core CPI ex fresh food slowed from +2.6% in Mar to +2.2% in Apr. However, the monthly pace of inflation has been accelerating over the last three months and the latest 3-month annualized rate is now back up to +2.7%.
Outlook for the week ahead
Inflation remains in focus this week – and importantly how progress on inflation will feed into the broader picture of rates and the path for central bank policy.
The main focus this week will be the US PCE inflation report for Apr. The determination of whether inflation is easing may still come down to two decimal places this month. The main core PCE inflation measure is expected to increase by +0.3% over the month in Apr (around +0.26%). This would bring annual core PCE inflation down slightly to +2.77% from +2.82% in Mar. The monthly headline PCE inflation rate is expected to ease from +0.3% in Mar and the annual headline rate is expected to ease from +2.7%.
Other US data; The monthly PCE spending (and income) data for Apr will be important in comparison to the recent weaker US retail sales report. Personal spending is expected to increase by +0.3% in Apr, slowing from the more robust +0.8% in Mar. The second reading of US GDP growth for Q1 is expected to ease slightly to +1.5% on an annualized basis (from +1.6% in the advance report). There will be a range of Fed speakers this week and the Fed Beige Book will be released, providing some commentary on activity among the Fed districts.
The Euro Area prelim CPI for May will be released this week – along with country-level CPI data throughout the week. Euro Area headline inflation is expected to be +2.5% in May, up slightly from +2.4% in Apr. Core CPI is expected to be unchanged at +2.7% in May.
The Aus monthly CPI for Apr is expected to ease slightly to +3.4% from +3.5% in Mar. The monthly inflation series differs in composition from the broader quarterly inflation report.
The core Tokyo CPI (ex-fresh food) is expected to increase by +1.9% in May, up from +1.6% in Apr.
This week, the US Treasury will auction and settle approx. $668bn in ST Bills, Notes, FRNs, TIPS, and Bonds raising approx. $158bn in new money.
QT this week: Approx $26bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $29bn in Notes & Bonds will be redeemed and will 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
