by Kim | Jan 20, 2025
Key events this week – Inauguration, central banks, and S&P prelim PMIS for Jan 2025
Recap from last week: US inflation concerns ease, growth momentum lifts.
Markets generally took comfort from the US CPI and PPI reports last week. The headline and core CPI rates were actually little changed in Dec compared to Nov, even firming slightly in the case of headline inflation, which increased to +2.9%. These topline results still indicate some risk of stalled progress on disinflation. However, the test of the disinflation narrative will likely emerge in the first few months of 2025 as inflation data cycles over the elevated readings from last year. This will happen alongside the unfolding detail of the policy direction of the new Trump administration and its implications for inflation.
While there wasn’t a clear downshift in US CPI this month, there were some signs that the path of underlying inflation continues to ease – especially in some of the services categories where inflation has been more persistent. Core services inflation was still high at +4.5% year-over-year in Dec (down from +4.6% in Nov), but the more recent annualized rates, +3.6% on a 3-month annualized basis and +3.2% on a 1-month annualized basis, suggest that the rate may continue to slow. Of note was the further progress on shelter price inflation – something that Fed officials have been expecting. The core services less shelter CPI measure also showed a similar improvement. This may give the FOMC some comfort that the underlying disinflation story remains intact.
However, despite slowing in the most recent month, some of these more near-term annualized rates remain elevated. Other measures of underlying inflation also suggest that more progress is needed. The trimmed mean CPI, also a consistent measure of the behavior of underlying inflation, has been little changed over the last five months at +3.2% and as of Dec, there is little difference among the annual, 6mth, or 3mth annualized inflation rates – suggesting little progress in near-term underlying inflation.
From here, it depends on how this CPI and PPI report translates into the Fed’s preferred PCE inflation measure for Dec. The Nov PCE inflation report did show more progress, especially over the month in Nov with core PCE coming in lower at +0.1% over the month. Fed Governor Waller also noted this in a recent speech. Another soft reading on the PCE indicator would help support the ongoing disinflation story. The latest Cleveland Fed PCE inflation nowcast for the PCE deflator for Dec indicates a possibly slightly firmer monthly core reading. The Dec PCE inflation report is due after the FOMC meeting next week.
US consumption, output, and housing data in Dec remained broadly positive. US retail sales growth was slightly lower than expected at +0.4%, but the Nov increase was revised higher. The retail control measure (feeds into the GDP consumption component) was notably stronger at +0.7% in Dec. US industrial production recorded a strong rebound in growth. The latest Fed Beige Book also noted an improvement in conditions from Nov through Dec among the twelve Federal Reserve Districts. The Atlanta Fed GDP nowcast for Q4 growth run rate lifted back up to a solid +3% by the end of last week. Leading up to the FOMC meeting next week, economic conditions remain generally positive in the US. Markets currently expect the FOMC to stay on hold at the Jan meeting and have, at the time of writing, moved back to pricing in one rate cut this year (CME FedWatch).
Other data from last week will be important ahead of the first central bank meetings of the year.
UK inflation for Dec was more constructive with headline and core inflation slightly lower than expected. The story of underlying inflation also improved, especially with the more persistent services inflation taking a notable step down to +4.4% in Dec (from +5%). This will be good news for the BoE. The BoE did not cut at the last meeting reflecting the need to “squeeze remaining inflationary pressures from the economy” amid “sluggish demand and a weakening labour market”. This weaker backdrop was partly reflected in data last week with falls in industrial production, retail sales, and modest growth in the monthly GDP indicator for Nov. The latest UK labor market data will be out this week, ahead of the BoE meeting in several weeks.
The Aus labour market report recorded surprisingly strong employment growth in Dec. The unemployment rate still increased slightly as the labour force participation rate increased to another new all-time high. The continued growth in employment will be welcomed by the RBA, given sluggish overall economic growth. The RBA has only just started to signal that the Board is gaining confidence that inflation is moving sustainably to the target. The crucial quarterly CPI report for Q4 will be released next week. At this stage, markets are pricing around Apr for the first cut.
Euro area headline inflation for Dec was confirmed at +2.4%, with core inflation remaining unchanged at +2.7%. Services inflation remained at +4% over the year and rose by +0.8% over the month. ECB officials reaffirmed confidence in expectations that inflation would return to the 2% target in 2025. Minutes noted that the “last step towards achieving the inflation target would be a moderation in services inflation”, which was projected to decrease noticeably H1 2025, and that “it cannot let its guard down in the final stretch of disinflation”. Concerns remained elevated over the growth outlook, policy uncertainty in its two largest economies, and the potential impact of US trade policy especially amid sluggish/uneven growth. The ECB meets next week.
Outlook for the week ahead; Inauguration, central banks, and the first S&P prelim PMIS for Jan 2025.
The main event this week will be the inauguration of US President Trump for his second term in office. In the first hours and days of the Trump Presidency, global markets and key stakeholders will be awaiting direction from announcements relating to major campaign promises, especially on trade, tariffs, and immigration policy. Later in the week, President Trump will also address the WEF Davos annual forum (20-24 Jan) via video link.
Key factors to watch this week;
With limited US data out this week, there won’t be an update to the GDP nowcast until the end of next week. Existing home sales for Dec are expected to increase slightly to 4.19m (annualized pace), up from 4.15m in Nov. The Michigan Consumer Sentiment for Jan is expected to be unchanged.
This week is the blackout period for US Fed speeches ahead of the FOMC meeting next week.
More broadly, the S&P Prelim PMIs for Jan will be released later this week. This will provide the first view of growth momentum among key G4 nations (and Aus) coming into 2025. The prior year ended with rising momentum in services activity helping to offset some lackluster manufacturing conditions.
The first central bank meetings of 2025 will begin this week – with most major central banks meeting over the next few weeks. Data this week will feed into those decisions.
The first meeting will be the Bank of Japan this week, with its policy announcement/decision expected on 24 Jan. The BoJ kept rates unchanged at its last meeting in Dec. In his press conference after that meeting, BoJ Governor 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”. Yet with limited resolution on those sticking points, speeches and interviews over the last few weeks have raised market expectations for a hike by the BoJ later this week. Governor Ueda indicated that a hike may be under consideration at this meeting, and also noted some early positive developments on wage negotiations. The key National CPI report for Dec will be released at around the same time as the BoJ meeting. The BoJ-preferred core CPI measure ex fresh food is expected to lift from +2.7% in Nov to +3% in Dec.
Canada’s CPI for Dec is expected to ease. Headline CPI is expected to slow to +1.7% in Dec from +1.9% in Nov. Measures of core inflation are also expected to slow further. The BoC Business Outlook survey will also be released this week, providing a broad view of activity leading up to the BoC meeting next week.
NZ CPI for Q4 is expected to ease further to +0.5% over the quarter, down from +0.6% in Q3. The annual rate is expected to slow to +2.1% in Q4 from +2.2% in Q3.
This week, the US Treasury will auction and/or settle approx. $603bn in ST Bills raising approx. $106bn in new money. The US Treasury will also auction the 10-year TIPS and 20-year Bond this week – both to settle at the end of the month.
QT this week: Approx $12bn 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 | Jan 13, 2025
Key events this week – US CPI, PPI, & retail sales, China GDP, Trump cabinet confirmation hearings start
Recap from last week: FOMC minutes and a better-than-expected US jobs report.
The Dec minutes show the FOMC navigating a shifting balance between increased upside risks to the inflation outlook and some diminishing downside risks to the labor market. The committee decided to cut rates by 25bps at the Dec meeting, but some Fed members noted that there was “merit” in keeping the FFR unchanged. The “finely balanced” decision aimed to maintain strength in the economy and the labor market while continuing to support progress on inflation.
Regarding the outlook though, the Committee indicated that the pace of future rate cuts would likely slow down. If data comes in as expected with inflation continuing to move down to 2%, and the economy remaining near max employment, it would be appropriate to move gradually to a more neutral stance over time. Although inflation had eased over the last two years, members noted recent elevated inflation readings, slower progress on disinflation through the latter half of 2024, strength in spending, some easing in downside risks for the labor market, and importantly, “increased upside risks to the outlook for inflation”. After 100 bps of rate cuts, monetary policy was seen as “significantly less restrictive” and the FFR closer to its neutral value. Amid this backdrop of firmer inflation, a solid labor market, robust growth, and some Fed easing already in place, the high degree of uncertainty regarding the scope and impact of new trade and immigration policies on growth and inflation also supported a more gradual approach toward neutral policy settings.
The Dec US jobs report likely helped to alleviate any concerns over a near-term weakening in the labor market. Non-farm payroll growth for Dec exceeded expectations, increasing by 256k jobs, building further on the rebound from the weak Oct report. Revisions for Oct and Nov were minimal. The detail of the payroll report was positive, with growth in total non-farm payrolls led by the private sector. The split between private goods-producing and services-providing jobs growth reflected the broader trends in the US economy; weaker conditions in manufacturing jobs were offset by stronger growth among service industries.
The unemployment rate fell to 4.1% in Dec, easing from its near-term peak of 4.2% in Nov. The lower unemployment rate was the result of a rebound in employment growth after two months of declines. The LFPR was unchanged in Dec but has edged lower in recent months. Of note was a further fall in the participation rate within the core working age group. After peaking at 83.9% in Aug 2024, the participation rate for 25-54yrs has fallen back to 83.3% in Dec. This is still just above the pre-pandemic level of 83% (Dec 2019), but it has lost some of the more notable pandemic-era gains. The rising participation rate has likely been an important contributor to improved labor supply, as well as helping to underpin income and consumption growth.
Growth in hours worked was in line with payroll growth. Average hourly earnings increased in line with expectations at +3.9%. There was a solid rebound in job openings in the Nov JOLTS report, indicating some increase in labor demand.
The next FOMC meeting is on 28-29 Jan. If inflation progress remains little changed/stalled in Dec, this labor market report likely supports no action from the Fed in Jan. At the time of writing, market pricing for rate cuts has been pushed out later into H2 2025 (source: CME FedWatch).
As expected, other US data last week helped to firm the growth run rate for Q4. The Atlanta Fed GDPNowcast for Q4 GDP growth edged higher from +2.4% to +2.7%. Growth in auto sales for Dec and the stronger momentum in the ISM services PMI contributed to a firming in the Q4 growth run rate.
More broadly, the S&P global composite PMI for Dec showed a further improvement in global private sector growth momentum at the end of 2024. This was led by a further increase in global service sector business activity that more than offsetting the renewed, yet slight, contraction in global manufacturing output.
Outlook for the week ahead; Focus on US CPI, PPI, retail sales, and US Senate confirmation hearings.
It will be another important week for the outlook on US inflation, growth, and what it means for the near-term path of rates ahead of the next FOMC meeting. The focus will be on US CPI and PPI, together with a solid range of US spending, housing, and output data for Dec.
We may also start to gain some sense of the incoming administration priorities ahead of the inauguration of US President-elect Trump next week. Senate confirmation hearings for President-elect Trump’s cabinet nominees will begin this week with some notable hearings including the US Treasury Secretary. This may come with some headline risk.
With the labor market remaining solid, the latest US inflation data will be an important input ahead of the next Fed meeting on 28-29 Jan. This will also depend on how both the CPI and PPI results track back into the Fed-preferred PCE inflation measure. The next PCE inflation report will be released 31 Jan.
This will also be the final week of Fed speeches before the blackout period ahead of the next FOMC meeting.
Key factors to watch this week:
- The week kicks off with US PPI for Dec; US headline PPI for Dec is expected to increase by +3% over the year, unchanged from +3% in Nov. The increase in monthly PPI is expected to be unchanged at +0.3%. Annual core PPI is expected edge lower to +3.2% in Dec, from +3.4% in Nov. The monthly increase in core PPI is expected to be unchanged at +0.2% in Dec.
- US headline CPI is expected to increase slightly to +2.8% over the year from +2.7% in Nov. The monthly increase in CPI is expected to remain unchanged at +0.3% in Dec. Core CPI is expected to ease slightly to +3.2% over the year in Dec, from +3.3% in Nov. The increase in monthly core CPI is also expected to ease to +0.2% in Dec from +0.3% in Nov.
- US retail sales for Dec are expected to increase by +0.5%, from +0.7% in Nov. In Nov, growth in the retail control measure (feeds into GDP consumption calculations) was +0.4%.
- US industrial production is expected to increase by +0.3% in Dec after falling by -0.1% in Nov. The first regional Fed manufacturing surveys for Jan will be released this week.
- US housing data is expected to be little changed. New permits in Dec are expected to edge lower to 1.46m (annualized) from 1.49m in Nov. Housing starts are expected to increase to 1.33m (annualized) from 1.29m (annualized) in Nov.
- The US Fed Beige Book will be released this week providing a summary of regional insights into economic activity ahead of the FOMC meeting at the end of the month.
Outside of the US, the focus shifts to UK and Euro area inflation, the Aus labour market update, and important data on Chinese growth.
- The final version of the Euro area CPI for Dec will be released this week. Last week, the Euro area prelim CPI for Dec came in as expected at +2.4% in Dec, up from +2.2% in Nov. Core CPI was unchanged at +2.7%. Services inflation firmed to +4%, and increased by +0.8% over the month.
- The ECB minutes will be released this week.
- UK CPI is likely an important data release for the BoE outlook. The decision not to cut at its most recent meeting reflected the need to ‘squeeze remaining inflationary pressures from the economy’ amid some weakening in near-term activity. The increase in UK headline CPI is expected to be unchanged at +2.6% in Dec. Core CPI is expected to ease slightly to +3.4% in Dec, from +3.5% in Nov. One of the key inflation measures to watch will be services inflation – which had stalled at +5% in both Oct and Nov.
- The Aus labour market data for Dec will be released this week. Net employment growth is expected to slow to +10k in Dec while participation is expected to remain unchanged at 67%. The unemployment rate is expected to edge higher to 4% in Dec, up from 3.9% in Nov.
- There will be a notable range of Chinese economic data out this week. Growth in Q4 is expected to lift to +1.7% over the quarter, from +0.9% in Q3. Annual GDP growth is expected to reach +5% over the year in Q4, up from +4.6% in Q3. Fixed asset investment (exp +3.3%), industrial production (exp +5.4%), and retail sales (exp +3.5%) growth in Dec are expected to be little changed from Nov.
This week, the US Treasury will auction and/or settle approx. $609bn in ST Bills, Notes, and Bonds raising approx. $34bn in new money.
QT this week: Approx $36bn of ST Bills, Notes, Bonds, and TIPS will mature on the Fed balance sheet and will be reinvested. Approx $16.4bn of Notes, Bonds, and TIPS will mature on the Fed balance and will be redeemed/roll off the Fed balance sheet.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Kim | Jan 6, 2025
Key events this week – US jobs report Dec, FOMC minutes, Fed speeches, CPI: Euro area, China, and Australia
Recap from last week: Manufacturing activity remains weak in December.
Despite another quiet week for economic data, the Atlanta Fed GDPNowcast for Q4 US GDP growth recorded a marked slowdown. Following the release of the advanced economic indicators on 27 Dec, the GDP nowcast was revised down to +2.6% from +3.1%. It slowed further again to +2.4% after the release of the Dec ISM manufacturing PMI. While this is a notable slowdown, the stronger US services sector PMIs and US jobs data this week should help to balance the view of Q4 growth.
Two key surveys released last week showed continued weakness in the US manufacturing sector in Dec. The ISM manufacturing PMI for Dec showed conditions remaining relatively flat, though improving to a modestly neutral level from the prior month. The S&P manufacturing PMI for Dec also showed the manufacturing sector continuing to contract slightly in Dec. After improving in Nov, sentiment in the outlook for manufacturing output growth eased back again. This week, the US services PMIs will be closely watched to gauge the overall health of the US economy. The expansion in services activity over the second half of 2024 has been offsetting the stalled US manufacturing sector.
There was broadly weaker momentum in manufacturing activity in Dec with the S&P global manufacturing PMI shifting back into slight contraction. Output, orders, employment, and purchase of inputs all declined, but supplier lead times lengthened. Intermediate and investment goods industries remained weaker while activity in consumer goods continued to expand. On a country basis, the strongest expansion in output was recorded in India followed by the Philippines, Spain, Greece, Taiwan, and Canada. The strongest declines in output were again observed in France and Germany – two of the leading manufacturing nations.
Outlook for the week ahead; Focus on the US jobs report and the FOMC.
It will be another short week with the National Day of Mourning for President Carter on 9 Jan 25.
The US jobs report, FOMC minutes, and Fed speeches will likely provide valuable insights and could potentially shape the near-term economic outlook. The release of the FOMC minutes is not yet scheduled on the Fed calendar at the time of writing but should be scheduled for the 8 Jan.
The FOMC minutes and the Fed speeches will be the first substantial input from the Fed since the unexpected hawkish shift at the Dec FOMC meeting. Both could provide valuable information for understanding the Fed’s change in stance. This week, Fed Governor Waller will provide an update on the Economic Outlook. Governor Waller is generally instructive in providing a framework for thinking about the near-term data and implications for policy. In his recent speech on 2 Dec, Governor Waller balanced his remarks on inflation. He noted that while recent data had raised the possibility of stalling inflation progress, he cautioned against overreacting, given that a similar firming of inflation in 2023 had subsided. Also, Governors Cook and Bowman will speak on the economic outlook this week.
The FOMC Dec minutes should provide important insight into the decision to cut rates and signal a shift in its stance that rates are now “significantly closer to neutral” and that it will move cautiously on rate cuts if the economy evolves as expected. Guidance was changed at that meeting to reflect the extent of further cuts would be limited, consistent with being closer to neutral, and that it was now appropriate to slow the pace of adjustments. Fed Chair Powell noted that while the disinflation story remained intact and they are confident on the path to 2% inflation, progress on achieving the 2% inflation target may take longer than expected. This was reflected in the PCE inflation projections out to 2026. The overall decision noted elevated uncertainty in the outlook with the Fed expecting significant policy changes from the incoming Trump administration.
The important point for the Fed’s rate path in the near term is that “as long as the economy and the labor market are solid, we can be cautious about, as we consider further cuts” (source: FOMC Press Conference 18 Dec 24). Fed Chair Powell also noted that “we want to keep the labor market pretty close to where it is now”. The US jobs data this week will therefore be a crucial input for the Fed as it considers its next move on rates. In Nov, payroll job growth had rebounded after the strike and weather disruptions, while the unemployment rate increased back in line with YTD highs. Unexpected labor market weakness could see the Fed quickly shift its outlook, while a stronger, or ‘in line’, jobs report will likely keep the Fed’s path unchanged.
Key factors to watch this week:
- US non-farm payroll growth is expected to slow to +154k, after increasing by +227k in Nov. The direction of revisions to Nov will be important for the underlying trend of payroll growth. Some central banks are increasingly referencing the split between market and non-market (govt) job growth to measure private sector strength.
- From the household survey; the US unemployment rate is expected to be unchanged at 4.25% while the participation rate is also expected to be unchanged at 62.5%. Average hourly earnings are expected to be unchanged at +4% over the year in Dec. The monthly rate is expected to slow to +0.3% in Dec from +0.4% in Nov.
- The JOLTS survey for Nov (lags by a month) is expected to show job openings at 7.77m in Nov, little changed from the Oct level of 7.74m.
Outside of the US, the focus shifts mostly to inflation data.
- Euro area prelim CPI for Dec is expected to be slightly firmer over the year at +2.4% in Dec, up from +2.2% in Nov. Core CPI is expected to be unchanged at +2.7%. The ECB recently noted that its expectations are for inflation to fluctuate in the near term around current levels due to energy price base effects.
- The Aus CPI monthly series for Nov is expected to show headline inflation increasing to +2.3% over the year, up from +2.1% in Oct. This monthly data series is relatively new, with the quarterly report providing a more detailed inflation reading for the RBA.
- China CPI is expected to be little changed at +0.1% over the year in Dec, down from +0.2% in Nov. Chinese trade data will also be released toward the end of the week. Last month, the Chinese trade surplus increased after stronger growth in exports and another decline in imports.
- The S&P Global services PMIs for Dec will be released early in the week, providing the broader picture of private sector activity in the final month of 2024.
This week, the US Treasury will auction and/or settle approx. $470bn in ST Bills, raising approx. $4bn in new money. The US Treasury will also auction $119bn across the 3-year and 10-year Notes and the 30-year Bond this week – all to settle on 15 Jan.
QT this week: Approx $9.1bn 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 30, 2024
Key events this week – US ISM manufacturing PMI, global PMI’s Dec
Recap from last week: The Atlanta Fed Q4 GDP growth run rate is unchanged.
US economic growth continues to maintain stronger momentum through the second half of 2024.
The final estimate of US Q3 GDP growth was recently revised higher to a +3.1% annualized pace – driven by an acceleration in exports, consumer spending, and federal government spending in the quarter (source: BEA). Based on limited data last week, the Atlanta Fed GDP nowcast for Q4 US GDP growth remained steady at a +3.1% run rate, indicating continued robust economic activity. However, data highlight that pockets of weakness remain, particularly in US residential investment as mortgage rates have again risen. Data last week showed that US new home sales in Nov detracted slightly from growth in Q4, but this was offset by contributions from the durable goods report. Looking ahead to 2025, the US growth backdrop remains positive, amid a hawkish shift by the Fed and the uncertainty surrounding the extent of new Trump administration policies.
In contrast, the minutes from some central banks have highlighted concerns regarding their respective growth outlook.
The latest RBA minutes detailed the shift in the Board’s outlook at the Dec meeting. The Board noted that data had broadly evolved as expected and not enough to shift its forecasts. However, risks that inflation may resolve more slowly had diminished, while downside risks to activity had strengthened. Two points led to this shift in risks; recent weaker activity (Q3 GDP), and wage growth that had slowed by more than expected, suggesting greater capacity in the labour market than had been assumed. Guidance shifted to reflect the Board gaining some confidence that inflation is moving sustainably to the target – “but risks remain”. At the time of the decision, this led markets to begin pricing in the possibility of an earlier rate cut, potentially as soon as Feb, when the next set of forecasts will be released. As of 27 Dec, markets are pricing in a rate cut by Apr.
The BoC deliberations outlined the debate between a 25 or 50bps rate cut at its last meeting. The Governing Council reduced rates by 50bps citing downside risks to its inflation forecast and a weaker growth outlook. Policy settings no longer needed to be “clearly restrictive”. Not all recent data had pointed to a need for a 50bps cut, but the cumulative effect of rate cuts since June would be needed to reduce the slack in the economy and maintain inflation around the 2% target. In light of ‘substantial’ cuts since June, guidance was shifted to expectations for “a more gradual approach” to monetary policy going forward.
Outlook for the week ahead; Another short week, focus on Dec PMIs.
It will be another short week with a quiet data calendar. US data will be limited to the ISM manufacturing PMI, pending home sales, and vehicle sales for Dec.
The full suite of global PMIs for Dec will begin to be released this week and will provide a broad update on momentum in private-sector manufacturing and services activity in the final month of the year.
Key factors to watch this week:
- US ISM manufacturing PMI for Dec – the headline index is expected to be little changed at 48.3 (from 48.4 in Nov). This will feed into a limited update to the Atlanta Fed GDP nowcast for Q4.
- US pending home sales are expected to increase by +0.9% in Nov after +2% in Oct. The slowing in activity partly reflects the renewed increase in mortgage rates since the end of Sept.
- S&P global manufacturing PMI reports for Dec will begin to roll out this week, with the services reports to follow next week.
This week, the US Treasury will auction and/or settle approx. $658bn in ST Bills, Notes, Bonds, and TIPs, raising approx. $35bn in new money.
QT this week: Approx $12bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $18bn in Notes and Bonds will mature on the Fed balance sheet 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
From our team to yours, we extend warmest wishes for the holidays. May the New Year bring you health and happiness!
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
