by Kim | Dec 23, 2024
Key events this week – US durable goods orders, RBA & BoJ minutes
Recap from last week: Fed signals shift to a cautious approach to further rate cuts.
The FOMC decision last week signaled a more hawkish shift in the Fed’s stance. Even the decision to cut rates by 25bps last week was described as a “closer call” by Fed Chair Powell. There was one dissenting vote – Beth Hammack preferred to keep policy settings unchanged.
The Fed’s Dec decision reflected a shift away from ‘recalibrating policy’, to being “at or near a point at which it will be appropriate to slow the pace of further adjustments”. After 100bps of cuts over the last three meetings, the Fed signaled that it is now “significantly closer” to the neutral policy rate, and it will be moving cautiously on further rate cuts. The SEP reflected fewer rate cuts for 2025 – with 50bps of cuts penciled in at this stage.
“Nonetheless, we see ourselves as still on track to continue to cut.” Fed Chair Powell, Press Conference 18 Dec 2024
This shift partly stems from a change in the Fed’s view on the upside risk to inflation. While the Fed maintains its belief in the disinflationary trend, it acknowledges that more work needs to be done to bring inflation down. PCE inflation is likely to end the year higher than expected, and FOMC members now project higher headline inflation at the end of 2025, with a longer path back to the 2% target according to the latest SEP. The stalling progress on inflation was acknowledged at this meeting;
So you’ve got, you had two months of higher inflation, September and October, as I mentioned November is back on track but once again we’ve — we’ve had a year-end projection for inflation and it’s kind of fallen apart as we’ve approached the end of the year.
“…inflation has once again underperformed relative to expectations.” US Fed Chair Powell, Press Conference 18 Dec 2024
However, the slower rate cut path also considered that the growth outlook is likely to remain stronger and unemployment stable, while near-term, policy uncertainty remains elevated. New guidance reflected this firmer growth backdrop and slower progress on inflation, emphasizing the need to carefully consider the “extent and timing” of further rate cuts. Fed Chair Powell noted that the FOMC will be looking for further progress on inflation and continued strength in the labor market before considering additional rate cuts.
The Nov PCE inflation report showed some improvement on a monthly basis, with headline inflation moderating to +0.1%. However, the annual inflation rate increased from +2.3% in Oct to +2.4% in Nov, highlighting the Fed’s ongoing concerns. While headline inflation was +2.7% a year ago, most of the 0.26 percentage point decline since then occurred in the first half of the year. Moreover, the projection for headline PCE inflation in 2025 has been revised upward to +2.5%, exceeding the +2.1% projected in Sept.
Core PCE inflation has remained firm, posing a challenge for the Fed. While acknowledging this, Fed Chair Powell highlighted progress in certain areas. In Nov, core PCE inflation remained unchanged at +2.8% year-over-year, with the monthly rate easing to +0.1%. A year ago, core PCE was at +3.2%, with most of the 0.4 percentage point decline occurring in the first five months. This context informs the Fed’s 2025 projection. Core PCE is projected to reach +2.5% by the end of 2025, representing a decrease of only 0.3 percentage points from the November 2024 level. This slower pace of deceleration compared to earlier in the year underscores the challenge for the Fed. Despite this, Fed Chair Powell emphasized that a decline to +2.5% core PCE inflation by the end of 2025 would still represent “significant progress.”
So we and most other forecasters still feel that we’re on track to – to get down to 2 percent it might take another year or two from here, but I’m confident that that’s the path we’re on. US Fed Chair Powell, Press Conference 18 Dec 2024
Both measures of PCE inflation were projected to be at 2% at the end of 2026, as recently as the September projections. The projection of 2% inflation has now been pushed out to the end of 2027.
There was a varied emphasis regarding the other central bank decisions last week.
The BoE kept rates unchanged as expected, however, that decision was based on a 6-3 majority. There seems to be a narrowing path for the BoE; inflation is firm and domestic price pressures are “resolving more slowly” than expected, while near-term activity has been weakening. This is against a backdrop of elevated levels of policy uncertainty based on the Autumn budget measures, geopolitical uncertainties, and trade policy uncertainty.
The BoJ also kept policy rates unchanged and tended to emphasize maintaining more accommodative settings for now. Accommodative financial conditions are aiding the recovery, while inflation is forecast to reach the price stability target in H2 2025. Risks and uncertainty over trade policy remain elevated. Governor Ueda’s press conference seemed to be setting up for a later rate hike;
Ueda said more information on Japan’s wages and the policies of US President-elect Donald Trump is needed before the BOJ can decide on a rate hike. Source: Bloomberg
Outlook for the week ahead; Holiday week, US durable goods orders, and RBA/BoJ minutes.
It will be a short week with a quiet data calendar. US data highlights will be limited to the advance durable goods orders and new home sales – both of which will add to a further update to the Atlanta Fed GDP nowcast for Q4 growth. Several central banks will release minutes this week.
Key factors to watch this week:
- US Durable goods orders for Nov are expected to fall by -0.4% in Nov after increasing by +0.3% in Oct.
- New home sales are expected to increase at an annualized rate of +0.66m in Nov, up from 0.61m in Oct.
This data will top up the robust update on the US Q4 GDP run rate from last week. The Atlanta Fed GDP nowcast has the US Q4 growth run rate currently at +3.1%.
- The Tokyo CPI for Dec will provide an advance read on Japanese inflation for Dec. Tokyo core CPI ex fresh food is expected to increase to +2.5% in Dec, up from +2.2% in Nov.
There will be several central bank minutes released this week;
- The BoC will release the summary of deliberations for its 11 Dec meeting.
- The RBA will release the minutes of its latest meeting in Dec. This should provide some further background behind the shift from a restrictive outlook to a more dovish tone.
- The BoJ will release the minutes of the Oct meeting.
This week, the US Treasury will auction and settle approx. $513bn in ST Bills and FRNs, with a net paydown of -$42bn. The 2-year, 5-year, and 7-year Notes will be auctioned this week and will settle on 31 Dec.
QT this week: Approx $4.6bn of 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
From our team to yours, we extend warmest wishes for the holidays. May the New Year bring you health and happiness!
by Kim | Dec 16, 2024
Key events this week – US Fed rate decision, BoJ & BoE meetings, key data releases; US PCE inflation & retail sales, global CPI reports, and S&P prelim PMIs
Recap from last week: Implication of US inflation on Fed rate cut expectations.
Last week’s firmer US CPI & PPI reports did not change the expectations for a Fed Dec rate cut this week. Markets had mostly priced in a rate cut before the data and this probability edged up after the US CPI & PPI data was released (source; CME Fedwatch).
Firmer headline CPI was driven by larger contributions from food and energy inflation. Progress on core CPI has stalled at around +3.3% for the last four months. However, there were some positive developments within core CPI. Notably, inflation had eased in previously persistent categories such as shelter, core services, and “super core” inflation. The Fed has been anticipating further progress in these areas. Conversely, the deflationary impact of core goods inflation has weakened in recent months. With inflation showing some improvement in specific areas like shelter and core services, the FOMC is likely to maintain confidence in its path toward the 2% target. Nevertheless, the Fed is likely to acknowledge that inflation remains elevated and that achieving the target may take longer than anticipated.
The PPI came in slightly higher than expected. However, markets have focused on the implications of CPI and PPI for the Fed’s preferred PCE inflation measure. Some expectations are for core PCE to round down to a +0.1% rate in Nov and be unchanged at +2.8% over the year. The Cleveland Fed PCE Nowcast suggests a higher expected PCE and core PCE rate for Nov. The broader expectation is for +0.2% core PCE over the month. The FOMC will make its decision this week ahead of the release of the PCE inflation data.
It was the first of two weeks of key central bank decisions to conclude the year. So far, we continue to see a shift towards a less restrictive stance of policy with neutral rate settings as the target, cautious optimism on inflation progress, and some country-specific weakening in the growth outlook.
The first cab off the rank turned out to be China, with the Politburo announcing that it would “embrace a “moderately loose” policy strategy next year” (source: Bloomberg 9 Dec 2024), the first adjustment of its monetary policy stance in over a decade. Further detail is still expected on fiscal programs to support consumer spending and growth in the broader economy.
The RBA kept policy settings on hold. There was a notable shift in its view on inflation and guidance. The Board is now “gaining some confidence that inflationary pressures are declining” but that “risks remain”. The Board is seeing some of the softer data recently, including slower growth, as positive for the inflation outlook. The RBA shifted its guidance; removing reference to needing to be “sufficiently restrictive” on policy, and is no longer “not ruling anything in or out” regarding the next move on rates. Governor Bullock was specific about watching data over the next month. The Aus labour market data for Nov was firmer with the unemployment rate falling back to 3.9%. While employment growth rebounded from a flat month in Oct, the fall in total unemployed persons was also the result of another fall in the participation rate. The firmer labour market conditions remain in contrast to the slower growth environment but are at least supporting the RBA to stay on hold while inflation comes down.
The BoC cut rates by 50bps as expected. The Board noted that, after a “substantial” reduction in rates since Jun, those cuts need some time to flow through to the economy. The policy rate is likely approaching neutral, so the BoC is signaling that it would be moving to a more gradual approach to monetary policy, “evaluating the need for further cuts, one decision at a time”.
The ECB reduced its Deposit Facility Rate by 25bps as expected. The decision was based on its updated assessment of the inflation outlook – that, overall, the disinflation process is continuing. There was a shift in its guidance also; removing reference that “it will keep policy rates sufficiently restrictive for as long as necessary” and removing mention of “restriction” or “duration of restriction”. There was a downbeat view of growth, with the pace of economic recovery slower than expected. From the press conference, the ECB did discuss a 50bps cut at this meeting but deemed the 25bps cut more appropriate, given they still want to see further progress on inflation.
The SNB cut rates by 50bps. The Governing Board noted inflation pressure had decreased again in this quarter, more than expected. The SNB has forecast inflation to average only +0.3% over 2025 – with a high degree of uncertainty over this forecast, and “the development of the Swiss franc is still an important factor”. Without the 50bps rate cut at this meeting, the “conditional inflation forecast would have been lower”. Growth was “only modest” in Q3 and there was a further slight rise in unemployment.
Outlook for the week ahead; Fed’s rate decision amidst key economic releases.
It will be another pivotal week of central bank meetings and key economic data. The Fed is expected to cut rates again and provide a broad context for its policy outlook in 2025. A range of US economic data, including the Nov PCE inflation report, global CPI reports, and S&P prelim PMIs will also be released.
Key factors to watch this week:
- US Fed rate decision; the Fed is expected to cut rates by 25bps at this meeting. The decision details will be a key focus, especially for how the Fed is reading current labor market conditions and inflation firmness. We continue to expect a cautious approach, dependent on labor market conditions remaining positive. This should set the stage for any change in guidance on cuts through 2025. The focus will then shift to the key projections for the broader outlook period (the SEP). This should specifically address changes in the projected path of inflation, growth, unemployment, and the outlook for policy rates.
- Other central banks; The BoJ are expected to keep policy rates unchanged this month, despite recent speeches indicating that “rate hikes are nearing”. Guidance in speeches has been guarded, only noting that there was still a large amount of new data to consider in the lead-up to this meeting, suggesting it could be a live meeting. Similarly, the BoE is expected to keep policy settings unchanged.
- US core PCE Inflation for Nov is expected to increase by +0.2% over the month down from +0.3% in Oct. This would result in core PCE inflation increasing to +2.9% over the year from +2.8% in Oct.
A broad range of US data for Nov that will feed into a robust update on the US Q4 GDP run rate. Currently, the Atlanta Fed GDP nowcast has US Q4 growth running at +3.3%.
- US retail sales are expected to increase by +0.5% over the month in Nov, up slightly from +0.4% in Oct. The Oct retail control was mostly flat at -0.1% – and this is expected to rebound in Nov.
- The PCE personal spending report for Nov is also expected to show a further lift in consumer spending of +0.5% in Nov, up from +0.4% in Oct. Personal income growth is expected to increase by +0.4% after increasing by +0.5% in Oct.
- US housing starts are expected to rebound in Nov to 1.35m annualized, from 1.31m in Oct. Industrial production is expected to increase by +0.2% in Nov after a -0.3% fall in Oct. The first Dec regional manufacturing surveys will be released this week.
Global inflation reports will be in focus this week.
- In Canada, CPI inflation is expected to be +0.1% in Nov, down from +0.4% in Oct. The annual pace should ease from +2%. The BoC core measures of inflation averaged +2.4% in Oct and are expected to ease to +2.3% (avg) in Nov.
- UK headline CPI is expected to increase to +2.6% in Nov from +2.3% in Oct. Core CPI is expected to edge higher to +3.6% in Nov, from +3.3% in Oct. The Oct UK CPI report reflected somewhat broader inflation pressure. The BoE will be looking for some improvement on that this month and will be meeting after the release of this data.
- Japan’s National CPI had been a little firmer in Oct, specifically over the month. The BoJ preferred core CPI ex fresh food is expected to increase to +2.6% over the year in Nov, from +2.3% in Oct. This data will be released after the BoJ meeting announcement.
- The final Euro area CPI for Nov is expected to confirm headline CPI fell by -0.3% over the month and increased by +2.3% over the year. Core CPI is expected to be confirmed at +2.7% over the year in Nov.
Finally, the S&P prelim PMIs for Dec (key G4 developed markets + Aus) will be released early in the week. This will provide some insight into growth momentum in the final month of the year. There is some expectation for a recovery in manufacturing activity in the short term. The Nov PMIs for this group had shown manufacturing continuing to contract, while services growth slowed. The notable exception had been the continued stronger expansion of the US services sector.
This week, the US Treasury will auction and settle approx. $437bn in ST Bills, with a net paydown of -$34bn. The 20-year Bond and 5-year TIPS will be auctioned this week, to settle on 31 Dec.
QT this week: Approx $1.3bn of 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 | Dec 9, 2024
Key events this week – US CPI & PPI, Central bank decisions; RBA, BoC, ECB, & the SNB
Recap from last week: Mixed signals from the US labor market.
Fed Governor Waller’s speech last week addressed the central question facing the FOMC ahead of its meeting next week: Cut or Skip? Generally resilient conditions have had many questioning how many cuts are needed given US inflation has remained firmer, growth more resilient, and concerns over labor market weakness have abated. US Fed Chair Powell noted in his discussion last week;
“Growth is definitely stronger than we thought, and inflation is coming a little higher,” Mr. Powell said at The New York Times’s DealBook Summit on Wednesday. “The good news is that we can afford to be a little more cautious as we try to find neutral.”
In their speeches, neither Fed Chair Powell nor Governor Waller took a skip off the table for the Dec meeting. However, Governor Waller articulated a much higher bar for data to justify a skip at the next meeting and, is still leaning toward a cut. Fed Chair Powell didn’t provide a direction as to which way he is leaning on a Dec rate decision. Previously, he had indicated a cut in each of the last two meetings of the year if data evolved as they expected – this is still likely to be the case.
The Nov labor market data, a key factor in the Fed’s upcoming decision, presented a mixed picture. While there was a rebound in payroll growth in Nov, conditions in the household survey did not improve. The rebound in payrolls, hours, and nominal earnings indicated resilience. Payrolls and hours worked both recovered from October’s decline, while nominal and real wage growth remained firm. This adds to a positive outlook for household income.
Conversely, the household survey showed no similar rebound, indicating weakness had remained in Nov. The proportion of employed persons continued to decline, and, despite an offsetting fall in participation, the unemployment rate still increased back up to 4.25% – equal to the YTD high. Similarly, the unemployment rate for the core working age group increased to a new YTD high of 3.7% in Nov. While this wasn’t a sharp deterioration in conditions that might worry the Fed, it does suggest that the recent theme on “cooling conditions” remains intact. Hiring has slowed, but layoffs remain near lows. The pool of unemployed persons is rising, and it’s taking longer to find employment amid slower hiring conditions. Finally, research from the San Francisco Fed shows that overall labor market conditions have shifted from tight to one where labor supply now exceeds demand.
Overall, data last week was positive for US growth. As of 5 Dec (not including the jobs report from Fri), the Atlanta Fed GDP Nowcast for Q4 growth edged higher again to +3.3%. The next update will be early this week. After the US jobs report, markets priced in a higher probability of another rate cut by the Fed next week, but no notable increase in the outlook for cuts through 2025 at this stage.
Outlook for the week ahead; US CPI, PPI, and part one of central bank decisions.
The focus will be on two important areas this week. The first is US CPI & PPI reports for Nov and the second is the final round of central bank decisions for the year.
US CPI and PPI reports for Nov are expected to remain firm. Together, the CPI and PPI will provide a good estimate for the Fed-preferred PCE inflation rate for Nov. This will be another crucial input for the Fed decision next week, and for its 2025 outlook. Recent speeches indicate that some Fed members have been ‘less pleased’ about the firmness of inflation, noting that progress on core inflation appears to have stalled. However, the general sentiment has been that conditions indicate “inflation would likely continue to move down towards the Fed’s target.” (source: Bloomberg 3 Dec 2024).
Key factors to watch this week:
- US headline CPI for Nov is expected to increase by +2.7% in Nov, up from +2.6% in Oct. The monthly pace is expected to increase by +0.2% in Nov, versus +0.2% in Oct. US core CPI is expected to increase by +3.3% over the year in Nov, unchanged from +3.3% in Oct. Core CPI is expected to increase by +0.3% over the month in Nov, also unchanged from +0.3% in Oct.
- US PPI is expected to stay firm. Headline PPI is expected to increase by +2.5% in Nov, up from +2.4% in Oct. The monthly pace is expected to increase to +0.3% in Nov from +0.2% in Oct. Core PPI is expected to increase by +3.3% over the year in Nov from +3.1% in Oct. The monthly pace of core PPI growth is expected to be +0.3% in Nov.
It’s the first of two weeks of key central bank decisions to conclude the year. Within the decisions, we’ll look for any change in guidance. Updated forecasts for 2025 will help to shape the broader outlook for economic activity, rates, and any shift in the stance of central bank policy (restrictive, neutral, or shifting to accommodative?).
This week begins with the RBA, which is expected to keep settings unchanged. The RBA Governor has previously indicated that more than one quarterly CPI report would be needed to confirm a sustained decline in inflation. So, unless the labor market weakens significantly, the earliest potential rate cut could be in Apr or May next year. The RBA will consider the slower-than-expected growth for Q3, especially within the household sector. However, allowing for the treatment of government subsidies paid to households indicates that household spending may have strengthened in Q3. The latest RBA forecasts were released at the start of Nov, so no updates at this meeting. The important Aus labor market report for Nov will be released later in the week – conditions are expected to remain stable, with the unemployment rate edging higher to 4.2%.
The BoC is now expected to cut rates by 50bps this week, following the larger-than-expected rise in the unemployment rate to 6.8% in Nov. Lower inflation and falling interest rates may be fostering early signs of economic recovery. Given the notable increase in the unemployment rate, the BoC may seek to further support economic activity with a larger cut.
The ECB is expected to cut rates by 25bps, and new forecasts will be released. Progress on disinflation continues. Despite the weakening growth outlook, Q3 GDP growth was positive, indicating a rebound in household spending. However, recent weak activity reports and elevated political uncertainty in core Eurozone countries are likely to weigh on the ECB outlook.
Finally, the Swiss National Bank is expected to cut rates by at least 25bps.
The important Chinese Central Economic Work Conference will take place this week. Ahead of this meeting, and at the time of writing, the Politburo shifted its stance on monetary policy for the first time in over a decade, to “embrace a “moderately loose” policy strategy next year” (source: Bloomberg 9 Dec 2024) as officials prepare to address flagging economic conditions and uncertainty over tariffs next year. Chinese CPI, PPI, and trade data for Nov will also be released this week.
This week, the US Treasury will auction and settle approx. $571bn in ST Bills, Notes, and Bonds raising approx. $46bn in new money.
QT this week: Approx $3.2bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $7.1bn in Notes and Bonds 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
by Kim | Dec 2, 2024
Key events this week – US non-farm payrolls, Fed Chair Powell & Gov Waller speeches
Recap from last week: Slower progress on US inflation.
The US Fed’s preferred PCE inflation measure for Oct remained firmer, as both headline and core PCE inflation increased slightly. The core PCE inflation rate increased to +2.8% in Oct, exceeding the Fed’s year-end projection. The trend suggests that progress on underlying inflation appears to have stalled since May, reinforcing the challenge for the Fed to achieve its price stability target. Recently, the deflationary offset from core goods has become less pronounced, while core services inflation has continued to firm. Markets have continued to take this slower progress on inflation, amid the broadly resilient economic conditions, into account, with expectations for fewer rate cuts into 2025 (source: CME FedWatch).
An emerging sentiment around slower progress on inflation was reflected in the minutes of the FOMC meeting on 6-7 Nov, which occurred before this suite of firmer inflation data for Oct was released. The minutes highlight that;
“…participants remained confident that inflation was moving sustainably toward 2 percent, although a couple noted the possibility that the process could take longer than previously expected.” Source: FOMC Minutes 6-7 Nov
Despite the “somewhat” elevated core inflation, the discussion outlined the key dynamics expected to guide the path of inflation back down to target. Overall, the committee remained confident that inflation was returning sustainably to 2%. The minutes noted that while labor market conditions had eased from earlier in the year, the unemployment rate remained low. Recent labor market conditions had been affected by “temporary fluctuations from hurricanes”. Economic activity continued to expand at a solid pace. Current conditions supported the decision to further recalibrate the policy stance, “gradually moving towards a more neutral policy stance over time” with a 25bps cut in Nov. In responding to changes in the balance of risks, the minutes showed that the Committee could either hold the policy rate at a restrictive level if inflation remained elevated, or easing could be accelerated if the labor market or growth conditions deteriorated.
One of the themes of inter-meeting Fed speeches has been proceeding cautiously and gradually with rate cuts. Important speeches this week could provide opportunities for the Fed to signal any change in its intentions ahead of the next FOMC meeting, especially in light of the firmer Oct inflation data. This week, Fed Chair Powell’s discussion and Governor Waller’s speech on the economic outlook are particularly important, ahead of the blackout period next week and the Fed meeting the following week on Dec 17-18. For the moment, markets have shifted back towards pricing in a rate cut at the Dec meeting, while pricing in fewer cuts into 2025.
The latest Atlanta Fed GDP Nowcast for Q4 GDP remained little changed during the week. US personal spending and income, housing, and manufacturing data last week was broadly in line with maintaining the run-rate for Q4 GDP at +2.7%.
In Japan, the Tokyo CPI for Nov came in higher than expected. In an interview late last week, BoJ Gov Ueda signaled the possibility its Dec meeting could be ‘live’ for a rate hike decision, but without committing to a path of action;
Ueda last week said it’s “impossible” to predict the result of the next gathering as a large amount of new data was yet to be released in a signal that it will be a live meeting. Source: Bloomberg
In its final meeting for the year, the RBNZ cut rates by 50bps. The monetary policy committee noted that consumer price inflation had eased and was now close to the midpoint of the target range. Economic activity remained subdued while output remained below potential. The Committee expects to further reduce the OCR early next year if conditions continue to evolve as projected.
Outlook for the week ahead; US labor market update and speeches ahead of the Fed’s Dec meeting.
The focus this week will be on the broad update of US labor market conditions in Nov and will provide important input for the FOMC meeting on December 17-18. The Fed has been closely monitoring labor market conditions, especially viewing the notable weakness in non-farm payroll growth in Oct as a temporary event. The return to a more robust job market could reinforce expectations for fewer rate cuts amid the somewhat slower progress on inflation, while a weaker-than-expected report could signal rising expectations of accelerated rate cuts.
Key factors to watch this week;
- US non-farm payrolls are expected to increase by +202k in Nov, up from +12k in Oct. Revisions to prior months will be important for determining any shift in the overall trend.
- The US unemployment rate is expected to edge up to 4.2% – and this is still below the current Fed projection for the year-end unemployment rate of 4.4%.
- Hours and wage growth; Average weekly hours are expected to be unchanged at 34.3 while average weekly earnings are expected to slow slightly to +0.3% over the month, from +0.4% in Oct.
- JOLTS; The Job Openings for Oct (lags by one month) are expected to firm slightly to 7.49m in Oct from 7.44m in Sep.
We continue to monitor weekly initial claims data. Initial claims have fallen back down to the modest levels of this year, likely reflecting subdued layoff activity. At the same time, there has been a persistent increase in continuing claims – this could indicate slower hiring conditions. Initial claims for last week (Thanksgiving week), are expected to increase by 215k.
There will be several important Fed speeches this week, ahead of the Fed communication blackout next week. This might be an important opportunity for any shift in signaling by the Fed before the Dec 17-18 meeting. Of note, Fed Chair Powell will take part in a moderated discussion and Governor Waller will speak on the economic outlook early in the week. These speeches are scheduled before the release of Nov non-farm payrolls.
The US ISM surveys for Nov will help to confirm the recent direction of the US S&P PMIs – more widespread growth in services helping to offset lackluster manufacturing activity. The Fed Beige Book will be released this week, providing further insight into regional activity since early Oct.
Aus Q3 GDP is expected to accelerate to +0.5% over the quarter, from +0.2% in Q2. The components of that growth will be important, but generally, the firmer growth will support the RBA in keeping rates unchanged until further progress on inflation.
Finally, the broader global suite of PMIs for Nov will be released. Except for the US, the S&P flash PMIs for Nov offered a sobering view of output growth among larger G4 nations midway in Q4. The manufacturing sectors of the G4 countries remained in contraction, and the previously resilient service sectors had begun to show signs of slowing momentum.
This week, the US Treasury will auction and settle approx. $477bn in ST Bills raising approx. $6bn in new money.
QT this week: Approx $2.4bn of 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 | Nov 25, 2024
Key events this week – US Thanksgiving holiday, US PCE inflation & FOMC minutes, RBNZ meeting, more global CPI reports
Recap from last week: S&P prelim PMIs for Nov and global inflation reports; slowing growth and persistent inflation.
Broadly, the S&P flash PMIs for Nov offered a sobering preview of output growth among larger G4 nations midway through Q4. The manufacturing sectors of the G4 countries remained in contraction, and the previously resilient service sectors have begun to show signs of slowing momentum.
The clear exception in Nov was the US. It was the only G4 economy in the flash series with a positive and strengthening composite PMI. However, the underlying result was mixed as stronger services sector growth more than offset the renewed contraction of manufacturing output. The US manufacturing PMI remained in slight contraction, despite an improving outlook for manufacturing output growth. The US manufacturing PMI report noted lengthening lead times and slower declines in inventory as firms increased input purchases to front-run potential tariffs on imports.
US housing data was mixed. Existing home sales in Oct and new home builder sentiment in Nov both rebounded further. New housing building permits and housing starts were both slightly lower in Oct, likely due to weather effects, as well as firmer mortgage rates. There was only a small lift in the US Q4 GDP run rate and the latest Atlanta Fed GDP Nowcast increased to +2.6% at the end of the week. There will be a more substantial update to the US Q4 growth run-rate from data in the coming week.
US Fed speeches reinforced the themes of the US economy in a good position and rate cuts should continue to follow a recalibration path. Governor Bowman emphasized that the Fed has not achieved its inflation forecasts, and that progress on lowering inflation appears to have stalled. She also noted, similar to Dallas Fed President Logan last week, that the Fed may be closer to a neutral stance than we currently think. Markets are leaning towards pricing a slower pace of rate cuts. The current probability for another rate cut versus no change at the Dec meeting is becoming more evenly balanced (at the time of writing – see CME FedWatch).
Other developed market CPI data for Oct were mostly firmer than expected – though the weakening PMIs suggest that a backdrop of easing activity could support further falls in inflation.
Canada’s CPI was slightly firmer, especially across the core measures. However persistent services inflation did ease more than expected. The overall firmness of inflation in Oct could reduce expectations for another larger rate cut by the BoC in Dec. That assessment will be aided by Q3 GDP this week and growth is expected to slow to +1.5% annualized.
UK CPI also increased more than expected, reinforcing the trend that progress on inflation seems to have stalled since Apr 2024. Goods prices were higher in the month and provided a smaller deflationary offset over the year, while services inflation remained elevated at +5%. This may support the BoE’s “gradual approach” to removing policy restraint.
The Euro area core CPI for Oct was confirmed at +2.7% – still above target, but slowly moving lower. The ECB will also need to balance the stronger wage data for Q3 against a backdrop of weakening manufacturing and services conditions. The Nov flash PMI for the Euro area indicated a marked shift back into contraction in output midway through Q4. Larger declines in activity were recorded in France and Germany, with the PMIs reflecting elevated uncertainty regarding both domestic and international political headwinds.
Japan’s inflation rates were little changed, however, there was a notable rebound in monthly CPI of +0.6%. The important core CPI ex fresh food and energy increased to +2.3% in Oct. In a speech at the start of the week, BoJ Governor Ueda was cautious in providing guidance for the next policy move. At a speech later in the week, he repeated this point, noting that there is still a month to go before the next meeting. He did, however, reiterate that at the next meeting the BoJ “will “seriously” assess the impact of foreign exchange rates on inflation and the economy” (source; Bloomberg).
Finally, the RBA Minutes had a few interesting points. The Board is not seeing the conditions needed to begin rate cuts, despite some weakness in private consumption growth. Inflation is still too high, and the RBA noted that recent weakness in the labour market may be reversing. The Board “would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable”. This gained attention, suggesting that the earliest rate cut is now potentially out to May 2025 (assuming no negative unemployment or growth shock).
Outlook for the week ahead: US Thanksgiving holiday, US PCE inflation, FOMC minutes, and the RBNZ monetary policy meeting.
Even though this will be a shortened week, important central bank, inflation, and growth data will be released this week.
In the US, the focus will be on a shortened holiday week, the Fed-preferred PCE inflation for Oct, spending and income for Oct, durable goods orders for Oct, and the FOMC minutes.
Note the shift in the timing of US releases due to the shortened holiday week.
The US PCE inflation for Oct is expected to remain firmer. Headline PCE inflation is expected to increase to +2.3% in Oct, from +2.1% in Sep. This would be still in line with the latest Fed projection for year-end. The monthly headline rate is expected to stay at +0.2%. However, the core PCE rate is expected to increase to +2.8%, above the Fed’s latest projection of +2.6% for year-end. This would mark the highest level of core PCE inflation in five months – which has stalled between +2.6% and +2.7% for the last five months. Additionally, the monthly core PCE rate is expected to increase by + 0.3%.
Personal income for Oct is expected to be unchanged at +0.3% growth while personal spending growth is expected to slow to +0.4% in Oct from +0.5% in Sep.
Durable goods orders are expected to increase by +0.1% in Oct after falling by -0.8% in Sep.
The second estimate of US Q2 GDP growth is expected to be confirmed at +2.8%.
The latest FOMC meeting minutes will be released this week. At the last meeting the FOMC cut the FFR by 25bps, continuing to recalibrate it policy settings. The Committee shifted its language to reflect that it had gained confidence that inflation was on a sustainable path to 2%, but was not yet calling a victory on inflation.
Outside of the US, the RBNZ will meet for the last time this year and is expected to lower its policy rate by 50bps. The next RBNZ meeting will be on 19 Feb 2025.
The AUS monthly CPI series (goods-centric) is expected to increase to +2.3% in Oct from +2.1% in Sep. RBA Governor Bullock will speak at the CEDA conference this week and is expected to elaborate on some of the details released in the minutes last week. The next RBA meeting will be on 9-10 Dec.
Finally, the Euro area prelim CPI for Nov will be released this week, along with many of the country-level prelim CPI reports. Headline Euro area CPI in Nov is expected to increase to +2.4% from +2% in Oct, while core CPI is expected to be little changed at +2.7%.
This week, the US Treasury will auction and settle approx. $814bn in ST Bills, Notes, Bonds, TIPS, and FRNs raising approx. $205bn in new money. This is a relatively large week for treasury auctions.
QT this week: Approx $28bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $7.7bn on Notes & Bonds will mature on the Fed balance sheet and will be redeemed.
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
