by Kim | Sep 18, 2023
Key events this week – Monetary policy decisions; FOMC, BoE, SNB, & BoJ, CPI: Eurozone, UK, Canada, & Japan, Prelim PMIs Sep
Recap from last week
We have previously noted that central banks have been shifting to a pause in the rate hiking cycle, having (hopefully) reached a sufficiently restrictive level of policy rates. Global central banks all appear to be following a similar risk management approach by retaining guidance that further tightening may still be required while inflation remains above target.
Last week, the ECB raised its policy rates by a further 25bps. The increase reflects the assessment that inflation remains too high. However, the also ECB signaled that it may join other central banks in shifting to a pause in the cycle. The ECB considers that growth is likely to stay ‘subdued’ in the coming months and that policy rates have ‘reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target’. The ECB maintained its data-dependent guidance – that decisions on rates would still be based on the assessment of the path of underlying inflation.
US data since the end of July is unlikely to have changed the expectation for a Fed pause this week. However, resilient growth and CPI data may be enough for the FOMC to keep a further hike in the dots. US CPI for Aug was as expected – with an acceleration in headline inflation due to higher energy prices. Core inflation measures suggest that progress on inflation likely slowed this month. Nominal retail sales were higher than expected with growth heavily influenced by higher gasoline prices in the month. In real terms, annual retail sales growth remained stalled. Slower growth in manufacturing output for Aug was led by a 5% fall in the output of motor vehicles (reversing the prior month’s increase). The NY manufacturing survey for Sep was a bright spot – pointing to some stabilization in the recent trend of weaker regional manufacturing conditions. This included a further improvement in outlook sentiment.
Outlook for the week ahead
The focus this week remains firmly on central banks and monetary policy meetings.
The FOMC is expected to stay on hold this month. The FOMC is likely to note; resilient US growth, some easing of tight labor market conditions, and progress on inflation, despite remaining too high. The dot plot will provide some insight into the expectation for the path of rates from here. Markets have also been pushing out the timing for rate cuts. Other US data out this week includes US housing construction data. Permits are expected to be little changed at 1.44m (SAAR), starts are expected to slow to 1.44m, and existing home sales are expected to improve slightly to 4.1m (from 4.07m SAAR). Initial claims are expected to stay low at +226k.
The BoE is expected to increase its policy rate by 25bps. The last decision was not unanimous, so there could be further disagreement this week. In the inter-meeting period, UK inflation has stayed high, there has been a further rise in unemployment, and growth momentum has slowed. The latest CPI report for Aug will be released before the BoE meets this week. Headline inflation is expected to increase to +7.1% in Aug (from +6.8% in Jul), with the monthly rate rising from -0.4% in Jul to +0.7% in Aug. Core inflation is expected to stay elevated at +6.8%.
The SNB will meet this week and is expected to raise policy rates by 25bps.
The BoJ will meet this week and is expected to keep policy settings unchanged. There has been some signaling by the BoJ in the inter-meeting period that it could consider a further adjustment to policy settings by year-end. The latest Japanese CPI report will be released before the BoJ announcement. The main measure of core CPI ex fresh food is expected to remain mostly steady at +3% in Aug, down slightly from +3.1% in Jul.
Other inflation data out this week includes the final release of the Eurozone CPI for Aug. Eurozone headline and core inflation is expected to be confirmed at +5.3%. Canadian headline CPI for Aug is expected to accelerate to +3.8% (from +3.3% in Jul) while the monthly pace is expected to slow to +0.2% from +0.6%.
Finally, the prelim S&P PMIs for Sep will provide the first view of growth momentum going into the final month of Q3. Momentum has been slowing among key G4 economies, led especially by services sectors in Europe, the US, and the UK. Weaker manufacturing conditions may be starting to stabilize.
This week, the US Treasury will auction and settle approx. $392bn in ST Bills raising approx. $44bn in new money. The US Treasury will also auction the 10-year TIPS and 20-year Bond this week and both will settle in the following weeks.
QT this week: Approx $2.7bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $2.7bn in ST Bills will mature on the Fed balance sheet this week and will be redeemed/roll-off the 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 | Sep 11, 2023
Key events this week – US CPI & retail sales, ECB policy meeting
Recap from last week
A theme of slower growth emerged in central bank decisions and data last week. Central bank policy decisions continued to favor pausing at this stage of the cycle to allow time for rate hikes to take effect. Although inflation is still too high, central banks are taking a risk management approach to policy settings by pausing hikes while retaining guidance that further tightening may still be required.
The BoC kept rates on hold last week. There was a notable shift in the characterization of the Canadian economy between the Jul and Sep meetings. From the Jul meeting; “Canada’s economy has been stronger than expected, with more momentum in demand”. At the Sept meeting last week, this was downgraded to; “The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures. Economic growth slowed sharply in the second quarter of 2023, with output contracting by 0.2% at an annualized rate.”
The RBA kept rates on hold last week, noting that rate hikes were working to bring “a more sustainable balance between supply and demand”. Changes to the statement suggest that the Board sees tight labor market conditions easing. GDP growth in Q2 was on par with that of Q1 at +0.4%. Much slower private sector consumption and investment spending was offset by public sector spending. The inventory drawdown was a large offsetting factor while net exports were stronger in real terms. Nominal GDP growth slowed due to the sharp decline in the terms of trade as domestic prices increased.
European GDP growth was revised lower in the final release for Q2. Growth in the Euro area and the EU slowed to a stalled pace in Q2. Broader Eurozone retail sales volumes resumed falling again in Jul after stabilizing since Apr. The Jul and Aug Eurozone PMIs point to further weakness in growth through Q3 so far. This slowdown in activity together with still high inflation will weigh on the ECB decision this week. The ECB is expected to keep policy rates unchanged.
US services surveys provided a limited guide on growth momentum into Aug. The S&P Services PMI for Aug indicated a more notable slowdown in services output activity. The ISM Services PMI suggested that growth in services activity was more widespread in Aug – yet the underlying shifts in the output and orders indexes indicated a mixed picture. The US Fed Beige Book report showed that most districts recorded ‘modest’ economic growth during Jul and Aug – led especially by tourism. The latest initial claims fell back to a low level of +216k.
Outlook for the week ahead
This week is the final US CPI and retail sales report for Aug ahead of next week’s FOMC meeting. The FOMC remains in data-dependent mode and the data this week will be important inputs into finalizing the assessment of the path of inflation and growth since the last meeting. US Fed Chair Powell has emphasized the importance of the “totality of the data” and is looking for “supply and demand through the economy coming into better balance”.
Inflation data could muddy the waters this week. US headline CPI is expected to accelerate in Aug to +3.6% (from +3.2% in Jul) due to higher energy prices. Headline CPI over the month is expected to increase by +0.6% in Aug (up from +0.2% in Jul). The focus will likely remain anchored on the path of core CPI which is expected to slow to +4.3% over the year from +4.7% in Jul (slowing due mainly to base effects). Over the month, core CPI growth is expected to stay at +0.2% in Aug, on par with the +0.2% increase in Jul.
US retail sales growth in Aug is expected to slow to +0.2% after increasing by +0.7% in Jul.
US industrial production growth is expected to slow to +0.1% in Jul from +1% in Jun. The NY Fed Empire State Manufacturing survey will provide the first insight into regional manufacturing conditions in Sep.
We are in the blackout period for Fed speeches ahead of the FOMC meeting next week.
The OPEC monthly report will be released on Tue 12 Jul.
The ECB will meet this week and is expected to keep policy rates on hold.
Aus labor market data for Aug is expected to show some improvement in Aug after a weaker report in Jul. Net employment is expected to increase by +26k in Aug after falling by -15k in Jul. The unemployment rate is expected to tick down to 3.6% (from 3.7% in Jul).
The remaining Chinese data for Aug will be released this week. New loans, industrial production, and retail sales are expected to show improvement.
This week, the US Treasury will auction and settle approx. $490bn in ST Bills, Notes, and Bonds raising approx. $121bn in new money.
QT this week: Approx $5bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $22bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be redeemed/roll-off the 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 | Sep 4, 2023
Key events this week – RBA & BoC policy meetings, US ISM Services, Global services PMIs
Recap from last week
It was an important week of US data inputs helping to assess the path of the US labor market, growth, and inflation ahead of the next FOMC meeting this month. Data revisions played a prominent role in tempering the recent enthusiasm around resilient growth and a persistently tight labor market.
Payroll growth came in higher than expected for Aug at +187k despite the bankruptcy in transport and warehousing and several strikes. However notable revisions in the prior months suggest that payroll growth has not been as strong as previously thought. The 6-month average payroll growth is now down to +194k.
Several points indicate that labor market tightness may be easing. The participation rate increased more notably in Aug after several months unchanged but is still below the pre-pandemic peak of 63.3%. This led to a rise in the unemployment rate to 3.8% (also still historically low). Average hourly earnings growth continued to slow – now down to +4.3% over the year and +0.2% for the month. The JOLTS report for Jul, with revisions for May and Jun, suggested an accelerated slowdown in hiring, openings, and quits over the last two months. Hiring and openings are now mostly back in line with pre-pandemic levels. Layoffs & discharges remained low.
US growth indicators remained positive. Overall average weekly hours increased to 34.4 hours – led by goods-producing industries (mining & construction). The ISM manufacturing survey showed some improvement in manufacturing conditions, though still lacklustre. Anecdotes focused on weak orders growth; a function of unwinding inventories and backlogs, improving supply, and weaker demand.
US GDP growth for Q2 was revised lower to +2.1% from +2.4%. That was driven by fixed investment, change in inventories, and net exports making a smaller contribution to growth. Personal consumption growth was revised slightly higher. Still, the first view of Q3 PCE growth in Jul was stronger, increasing by +0.6% in real terms with both goods and services contributing to consumption growth. The updated Atlanta Fed GDP Nowcast for Q3 shows growth easing after the data from last week, but staying very high at +5.6% annualized.
Finally, there was little change in PCE inflation with both headline and core just slightly higher in Jul (due to base effects). Monthly inflation remained at a low +0.2% pace. So far, the headline and core measures of PCE inflation are within the range of FOMC projections provided at the Jun meeting. Headline PCE inflation in Jul of +3.3% is just above the median projection of +3.2%. Core PCE inflation in Jul was +4.2%, just above the median projection of +3.9%.
Outlook for the week ahead
US data this week will focus on services activity surveys for Aug, factory orders for Jul, and non-farm productivity data for Q2.
The final global PMI’s for services will be released this week helping to round out the view of global private sector momentum in Aug. The PMIs released so far indicate that the slowdown in global manufacturing activity has eased in Aug.
This week, the RBA and BoC will meet on monetary policy. The RBA is expected to keep policy rates unchanged. The monthly inflation data for Jul continued to ease, but core inflation measures are still high and persistent. There had been some easing in labor market conditions in Jul with the unemployment rate increasing to 3.7%, despite a fall in participation. Governor Lowe will give a speech this week titled “Some Closing Remarks”. This will be his final meeting before the new RBA Governor, Michele Bullock takes over in mid-Sep. Aus GDP for Q2 will be released after the RBA board meeting and growth is expected to be +0.3%, up slightly from +0.2% in Q1.
The Bank of Canada is expected to keep policy rates unchanged at 5%. GDP growth in Q2 stalled (fell slightly on an annualized basis by -0.2%) after expecting annualized growth of +1.2%. Readings of core CPI continued to slow in Jul. The unemployment rate in Jul increased for the third month in a row as employment growth stalled and participation declined. The latest Aug labor market report will be released later in the week. Employment growth is expected to rebound by +18.7k and the unemployment rate to stay unchanged at 5.5%.
This week, the US Treasury will auction and settle approx. $433bn in ST Bills raising approx. $70bn in new money.
QT this week: Approx $6bnbn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $6bn in ST Bills will mature on the Fed balance sheet this week and will be redeemed/roll-off the 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 28, 2023
Key events this week – US non-farm payrolls, PCE Price Inflation, Euro Area CPI
Recap from last week
“As is often the case, we are navigating by the stars under cloudy skies.”
An obscure closing reference to the Jackson Hole symposium theme of structural shifts in the global economy contributing to the complexity of navigating policy in a post-pandemic world. For the most part though, US Fed Chair Powell’s speech at Jackson Hole reiterated the key messages from recent meetings while striking a cautious tone on the path forward. Inflation has come down from its peak, but still has “substantial further ground to cover”. Chair Powell emphasized again the risk management approach, noting uncertainties around the possible outcomes. Potential lagged effects of policy tightening may still be felt – complicating the task of balancing over-tightening and under-tightening. The FOMC will proceed carefully but is prepared to increase rates further if appropriate, and at least maintain policy at a restrictive level.
Questions remain over how restrictive current policy is given that US growth has remained resilient, and the unemployment rate remains at a low 3.5%. Chair Powell did note that additional evidence of persistently above-trend growth or evidence that labor market tightness was no longer easing could call for a monetary response. Since the Jackson Hole speech, markets have started to price the possibility of another hike in Nov.
US data last week was still mixed. The prelim US S&P PMIs for Aug indicated that private sector momentum continued to slow. Persistent manufacturing weakness was offset by positive, yet slowing services sector momentum. But the overall employment situation remained unchanged and sentiment in the outlook improved somewhat. US mortgage applications continued to show the effects of renewed mortgage rate increases as applications (leading) fell to the lowest level since 1995. Existing home sales in Jul missed expectations and are now only just above the Jan 2023 low. But new home sales increased more than expected in Jul. Initial claims continued to move lower after a recent spike higher. Durable goods orders fell as expected, reflecting the large-scale aircraft orders booked in the prior month. The Atlanta Fed GDPNowcast ticked up to +5.9% for Q3 (still limited data) as the change in inventories helped to offset the weakness in residential investment.
The prelim Aug PMIs for the G4 (including Aus) showed overall momentum slowing. Manufacturing activity was weaker in all markets this month, with output indexes below 50. Services momentum stalled with shifts to outright declines in Germany, France, the UK, and Aus. Services remained in expansion in Japan (accelerating) and in the US. Despite the weakening conditions, employment growth was mostly unchanged from the prior month – except for falls in Europe & UK manufacturing sectors. There were signs of renewed input cost inflation this month.
Outlook for the week ahead
This week will be important for assessing the path of the US labor market, inflation, and growth ahead of the next FOMC meeting.
US non-farm payroll growth is expected to slow further to +170k in Aug (from +187k in Jul). The unemployment rate is expected to stay unchanged at 3.5%. Job openings for Jul are expected to show a slight increase to 9.8m (up from 9.5m in Jun). Average weekly hours are expected to stay unchanged at 34.3. This will be the second of the two labor market reports before the next FOMC meeting.
US PCE inflation data will be released earlier than usual this week (Thur rather than Fri). Headline PCE inflation is expected to increase to +3.3% from +3% (base effects). The monthly pace is expected to stay at +0.2%. Core PCE inflation is expected to increase to +4.2% from +4.1% in Jul.
US personal spending in Jul is expected to be a robust +0.6% in Jul, up from +0.5% in Jun.
The second estimate of US Q2 GDP will be released and is expected to stay at +2.4%.
The US ISM manufacturing PMI for Aug is expected to stay in mild contraction.
The Euro area prelim CPI for Aug will be released, and headline inflation is expected to ease from +5.3% to +5.1% in Aug. Core CPI is expected to ease from +5.5% in Jul to +5.3% in Aug.
The broader release of the Aug PMIs will commence with global manufacturing activity later in the week.
Finally, the Aus monthly CPI series is expected to show a further slowdown in inflation to +5.2% in Jul (from +5.4% in Jun).
Next week is a short week in the US with the Labor Day Holiday on 4 Sep.
This week, the US Treasury will auction and settle approx. $542bn in ST Bills, Notes, Bonds, and TIPS raising approx. $111bn in new money.
QT this week: Approx $28bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $17.4bn in Notes and Bonds will mature on the Fed balance sheet this week and will be redeemed/roll-off the 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 21, 2023
Key events this week – US Federal Reserve Annual Jackson Hole Economic Policy Symposium, Prelim PMIs Aug
Recap from last week
The FOMC minutes continued to emphasize that inflation is unacceptably high, and that policy will need to stay sufficiently restrictive. The minutes suggest that the FOMC may want to see growth slow (reflecting a better balance between aggregate supply and demand), and inflation ease, to feel confident that inflation is on a sustainable path to 2%;
Participants stressed that the Committee would need to see more data on inflation and further signs that aggregate demand and aggregate supply were moving into better balance to be confident that inflation pressures were abating and that inflation was on course to return to 2 percent over time. – FOMC Minutes
The shift to data-dependent guidance emphasized assessing the totality of the incoming data and the implications for the economic and inflation outlook. Policy tightening was seen as nearing its ‘destination’ and data in the inter-meeting period would determine the extent of additional policy firming that may be appropriate. The outlook also shifted as staff no longer judged that the economy would enter a mild recession by the end of the year. The minutes noted that risks to achieving the FOMC policy goals have become more two-sided, and the Committee would need to balance the risk of inadvertent overtightening with the cost of insufficient tightening.
Last week, US data on consumer spending, housing, and production suggested an even higher growth trajectory at the start of Q3. Retail sales growth for Jul came in stronger than expected at +0.8% with the prior month also revised higher. New housing permits and starts remained stable despite the higher rates environment. But homebuilder sentiment began to fall as mortgage rates increased to over 7%. Indicators of manufacturing and output were somewhat improved in Jul and several Aug surveys showed stabilization amid recent falls. Initial claims remained low. So far, the latest Atlanta Fed GDP Nowcast shows a notable acceleration in growth at the start of Q3.
Outlook for the week ahead
In the context of stronger US data and rising US long rates, the signaling from Fed Chair Powell at Jackson Hole will be important this week. The Fed is in data-dependent mode and there is still another round of inflation and payrolls data before the next meeting. This year’s symposium is on “Structural Shifts in the Global Economy” and US Fed Chair Powell is expected to speak on Friday morning.
The prelim Aug PMIs for key G4 markets will be released this week. These will provide some early insight into private sector growth momentum for Aug. Manufacturing in Jul showed ongoing weakness in the Euro Area while improving somewhat in the US. Services growth has broadly stayed positive while momentum has slowed over recent months.
Other US data this week will feed into the growth picture. Durable goods orders for Jul are expected to fall by -4% after much higher growth of +4.6% in Jun (led by large aircraft orders). Initial claims are expected to remain low at +244k. Existing home sales are expected to be little changed at 4.15m (SAAR).
This week, the US Treasury will auction and settle approx. $415bn in ST Bills and FRN’s raising approx. $94bn in new money. The US Treasury will also auction the 20-Year Bond and 30-Year TIPS this week – both will settle next week.
QT this week: Approx $13bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
