by Kim | Apr 24, 2023
Key events this week – US PCE inflation & ECI Q1, Aus CPI, US & Euro Area flash GDP Q1, BoJ Meeting
Recap from last week
Data painted a mixed picture of US growth momentum at the end of Q1 going into Q2.
The US Fed Beige Book survey contained anecdotes of stagnant growth between Mar and Apr among the Federal Reserve Districts. Three districts reported modest growth while nine reported no change. Of note was the varying experience of tighter lending and credit conditions since the recent bank failures. The first US regional manufacturing surveys for Apr were mixed. The NY Fed manufacturing survey recorded a stronger rebound, while the Philadelphia Fed survey reflected continued weakness in manufacturing activity. US housing data for Mar indicated a stall in the recent momentum across existing home sales, new permits, and starts. Homebuilder sentiment was little changed going into Apr, remaining low. Mortgage applications weakened further last week, retracing the prior five weeks of gains. Initial claims increased slightly to +245k, remaining within the higher, but sidewards trend, while continuing claims increased further.
In stark contrast were the flash PMIs for Apr. Across the G4 generally, the expansion in services growth that started in Feb strengthened further in Apr. This helped to offset some weakness in manufacturing, especially across Europe, the UK, and Aus. The US flash PMI for Apr showed stronger momentum across both manufacturing and services sectors as growth in output, inflation, and employment were more widespread.
Despite the mixed data messages, markets continued to price in a further rate hike at the May FOMC meeting next week. Rate cuts priced in after the recent bank failures have now been shifted further out to Nov.
Inflation remained persistent. Japanese core CPI surprised to the upside at +3.8% – a peak not seen since the 1908’s. UK CPI surprised to the upside for Mar at +10.1% and core at +6.2% (plus a strong labor market report). Inflation in Canada was mostly as expected while NZ CPI growth was lower than expected at +6.7%.
The RBA minutes outlined the case for a pause in hikes for at least one meeting. The minutes noted that policy could still be tightened further and that the pause would allow time to assess more data – especially the next quarterly inflation report this week (26 Apr), another labor market report, and updated staff forecasts. The minutes suggest that this data would be important in assessing the need for further tightening.
Outlook for the week ahead
Its a full week of US data across inflation, manufacturing, housing, growth, and the US consumer – ahead of the FOMC meeting next week. The US PCE inflation for Mar is expected to slow to +4.6% (from +5% in Feb), as core inflation is expected to remain little changed at +4.5% in Mar (+4.6% Feb). The important employment cost index for Q1 is expected to increase by +1.1% over the quarter (up from 1% in Q4). The flash US GDP growth for Q1 is expected to slow to +2% (annualized) from +2.6% in Q4. Also; durable goods orders, more regional manufacturing surveys for Apr, new home sales, and personal spending & income for Mar.
The latest Aus quarterly CPI report will be an important input for the RBA meeting next week. The quarterly CPI for Q1 is expected to show inflation slowing to +6.9% from +7.8% in Q4. Trimmed mean inflation is expected to stay elevated at +6.7% (from +6.9% in Q4).
The BoJ will meet this week – the first meeting led by Governor Ueda. There is speculation that the BoJ will review its policy approach – but not likely at this meeting. A full update on BoJ forecasts will be released and the framing around rising core inflation will be important.
This week, the US Treasury will auction and settle approx. $257bn in ST Bills and TIPS, with a net paydown of $1bn.
The US Treasury will also auction the 2yr, 5yr, 7yr Notes, and the 2yr FRN this week – to settle next week.
QT: Approx $29.8bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $43.5bn in Notes and Bonds will mature on the Fed balance sheet (30 Apr) 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
by Kim | Apr 17, 2023
Key events this week – Global inflation (UK, NZ, Japan, Canada, Euro area final CPI), RBA & ECB minutes, prelim PMIs, US housing
Recap from last week
The FOMC minutes reflected the decision to increase rates by 25bps despite heightened uncertainty stemming from several high-profile bank failures. While a pause in hikes was considered, the Committee ultimately decided to increase rates because of elevated inflation and the strength of recent economic data. The minutes also noted slower-than-expected progress on disinflation and the uncertain nature of the disinflationary process.
“…upside risks to the inflation outlook remained a key factor shaping the policy outlook, and that maintaining a restrictive policy stance until inflation is clearly on a downward path toward 2 percent would be appropriate from a risk-management perspective.” FOMC Minutes, 21-22 Mar
Actions taken by the central banks had calmed conditions in the banking sector and lessened the near-term risks of a shock to the economy. But the extent to which credit conditions might tighten was still regarded with a high degree of uncertainty. Some participants noted that given the stronger data and persistent inflation, and in the absence of banking sector issues, would have considered a 50bps increase – but judged it prudent to only go 25bps at this time.
US CPI growth continued to ease, slowing to +5% over the year, while measures of core inflation remain elevated and persistent at +5.6% in Mar (+5.5% in Feb). Similarly, the Fed’s ‘super core’ measure was little changed. The key issue is that the disinflation process has stalled over the last few months. But there were several encouraging signs with housing and food price growth easing over the month. The trimmed mean inflation rate slowed again, and more notably over the month. This suggests that inflation pressure may be starting to come from a narrower base of goods & services. But annual trimmed mean inflation is still extremely elevated at +6.2% (+6.5% in Feb).
Other US data showed some softening in momentum. US retail sales growth slowed more than expected by -1% in Mar (-0.2% Feb). In real terms, the annual growth of retail sales has averaged 0.1% over the last 12 months. This month was the first more notable year-on-year decline of 1.9% in real terms. US initial claims remained elevated at 239k – a higher level since the adjustment revisions.
Late in the week, Fed Governor Waller’s speech provided some guidance on the Mar inflation report. Despite slowing housing costs, core inflation had just moved sideways without an “apparent downward trend”. He noted that “we haven’t made much progress on our inflation goal”, leaving him “in about the same place on the outlook at the last meeting, and on the same path for monetary policy”. Policy may need to be tightened further, and the implication of slow progress on inflation was that policy “will need to stay tight for a substantial period, and longer than markets anticipate”. Since the speech, FFR probabilities have been firming for another hike in May, coming back more in line with FOMC projections.
Outlook for the week ahead
More key inflation reports will be released this week. Inflation in Canada is expected to ease to +4.3%. Inflation in the UK is expected to remain elevated at +9.8%. NZ inflation for Q1 is expected to remain elevated at +7.1%. Inflation in Japan is expected to ease but core inflation is expected to stay high at +3.4%. Euro area CPI (final) is expected to be confirmed at +6.9% for Mar.
The RBA and ECB minutes will be released this week. The RBA minutes will reflect the discussion around the decision to pause hikes. The Australian Treasurer has confirmed that the review of the RBA and its operations will be released “in the next week or two”. There will also be a host of Fed and other central bank speeches this week.
Key growth data out of China will be released this week with Q1 GDP and industrial production and retail sales for Mar. Chinese Q1 GDP is expected to increase by +4% year over year.
In the US, the focus will be on housing data for Mar. Recent mortgage application data has reflected some firming in conditions. That said, housing data is expected to be little changed for Mar (SAAR basis); Existing home sales are expected to be 4.50m, permits 1.45m, and starts 1.40m.
At the end of the week, the prelim S&P PMIs will provide the first view of growth momentum for Apr among the G4 economies. The Mar PMIs showed stronger growth momentum across services, helping to offset weaker manufacturing momentum.
This week, the US Treasury will auction and settle approx. $375bn in ST Bills, Notes, and Bonds, raising approx. $8bn in new money. The 17-Day CMB (settled 31 Mar) will mature on 17 Apr, with a paydown of $45bn. This brings the total paydown for the week to $37bn.
The US Treasury will also auction the 20-year Bond and 5-year TIPS this week.
QT: Approx $25.1bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $16.5bn in Notes and Bonds will mature on the Balance sheet (15 Apr) and will be redeemed.
Its also Tax Day on 18 April.
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 | Apr 11, 2023
Key events this week – US CPI & retail sales, FOMC minutes, BoC meeting, Aus labor market survey, US bank earnings
Recap from last week
While momentum in US labor market growth continues to slow, conditions remain tight. US non-farm payrolls increased by +236k in Mar. Payroll growth remained tilted to services-providing jobs, which increased by +196k, while goods-producing payrolls declined slightly by 7k. Govt payrolls increased by 47k. Overall growth in payrolls is still elevated compared to the pre-pandemic trend.
Employment growth (among 16yrs+) was high enough to absorb the increase in the participation rate and still reduce unemployment. The unemployment rate edged lower to 3.5%. Hours growth was slightly lower in Mar. Growth in average hourly earnings continued to moderate. The Feb JOLTS data reflected the slowing growth trend. Job openings continued to moderate with the opening rate easing to 6.0 in Feb, which is still well above the pre-pandemic average rate of 4.2. But hires continued to outpace separations helping to keep unemployment low. Growth in initial claims has lifted over the last few months (after the revision last week).
The US ISM surveys for Mar reflected further weakening in manufacturing momentum and moderate, yet slowing growth across services.
Market pricing for the path of US rates shifted after last week’s data (although shortened holiday session). Markets are now pricing one more hike to 5-5.25% in May, then a brief pause before pricing the first rate cut in July. This is still a point of tension with FOMC projections. Conditions would need to deteriorate notably in the few months ahead for the FOMC to take this path, with the FOMC noting that “cuts are not the base case” for 2023.
The RBA kept rates on hold to allow time to assess the effect of rate increases on the economy, amid heightened uncertainty. The statement noted that rate increases, higher inflation, and a fall in housing are starting to lead to a “substantial slowing in household spending”. With inflation still elevated and a tight labor market, the Board may consider further tightening if needed. Governor Lowe noted later in his National Press Club address that Aus mortgage rates had increased more than most other countries despite a lower cash rate.
RBNZ surprised markets with a 50bps increase, citing inflationary pressure and employment ‘beyond its maximum sustainable level’.
Global PMI’s reflected ongoing lacklustre manufacturing momentum while global services growth continued to expand, notably across China, the Eurozone, and Japan.
Outlook for the week ahead
US CPI and retail sales will be the important inputs providing a guide on consumption growth and inflation leading up to the next FOMC meeting. Headline US CPI for Mar is expected to moderate to +5.2% as data starts to cycle over the higher base from last year. The monthly pace is expected to slow to +0.2%. Core inflation though is expected to remain elevated, accelerating slightly to +5.6% in Mar with the monthly pace around +0.4%. US retail sales are expected to fall by -0.4% in Mar. The FOMC minutes will be released this week and should reflect discussion around expectations for further tightening of policy versus a market-based tightening in credit conditions related to recent bank failures.
The Bank of Canada is expected to keep rates on hold as previously signalled.
Finally, the Aus labor market survey for Mar will be released. Employment growth is expected to slow to +20k. The participation rate is expected to stay unchanged at 66.6% while the unemployment rate is expected to increase slightly to +3.6%.
This week, the US Treasury will auction and settle approx. $251bn in ST Bills with a paydown of approx. $9bn.
The US Treasury will also auction the 30-year Bond and 3 and 10-year Notes this week.
QT: Approx $19.4bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $16.4bn in Notes and Bonds will mature on the Balance sheet (15 Apr) 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
by Kim | Apr 3, 2023
Key events this week – US non-farm payrolls, RBA & RBNZ decisions, global S&P PMIs, and US ISM PMIs
Recap from last week
Attention shifted back to price stability last week. US PCE headline inflation eased slightly more than expected as food and gasoline prices contributed most to the deceleration in Feb. Core measures of inflation remained persistent. Core goods inflation eased, while core services continued to accelerate somewhat, led by housing. Measures of underlying inflation such as the trimmed mean and median inflation have eased from recent peaks, but suggest inflation pressure remains broad-based. More recent measures of core and underlying inflation (the 3mth and 6mth SAARs) are still slightly above the annual rates – suggesting more persistent core inflation around the mid-4% rate, above the 2% mandate, and the SEP for 2023 of +3.6%. The market pricing for the FFR has shifted again and is now 40/60 in favor of another hike in May while pricing several cuts through H2.
The fall in US consumer sentiment (University of Michigan) for Mar was noteworthy for its commentary;
“This month’s turmoil in the banking sector had limited impact on consumer sentiment, which was already exhibiting downward momentum prior to the collapse of Silicon Valley Bank”.
“While sentiment fell across all demographic groups, the declines were sharpest for lower-income, less-educated, and younger consumers, as well as consumers with the top tercile of stock holdings. All five index components declined this month, led by a notably sharp weakening in one-year business conditions.”
The Mar prelim Euro area inflation picture worsened. Headline annual inflation slowed notably mostly due to the higher base from energy prices a year ago. Importantly, the monthly and core readings show that inflation is not only persistent but also continues to accelerate. The estimated monthly increase in headline inflation for Mar accelerated to +0.9%, up from +0.8% in Feb. Core inflation accelerated further to +5.7% while the monthly core inflation rate also accelerated from +0.8% in Feb to +1.2% in Mar. Food, non-energy industrial goods, and services price growth continued to accelerate. Energy prices fell versus a year ago, and more notably over the month.
Aus headline inflation slowed more than expected in Feb (the monthly series) to +6.8%. Since Dec, most of the rapid disinflation has been due to the reversal of the higher holiday travel and accommodation prices reported during Nov and Dec (first vacations without Covid restrictions). Looking through the impact of higher recreation and culture prices, ‘underlying’ inflation has eased, but remains high. Retail sales growth slowed as expected, but stayed positive. Both will be important inputs for the RBA this week.
Outlook for the week ahead
Growth in US non-farm payrolls for Mar is expected to moderate to +240k this month after increasing by +311k in Feb. Participation is expected to stay at 62.5% and the unemployment rate is expected to be unchanged at a low of 3.6%. The payroll report will be released on the morning of the Good Friday holiday.
A wide range of US labor market indicators will be released this week, including Feb JOLTS and the Challenger job cuts survey for Mar. Note that new seasonal factors for 2023 initial and continuing claims will be released and revisions to 2018-2022 will be released on 6 Apr. Last week, initial claims increased to +198k and are expected to be around +200k for the week ending 31 Mar.
The US ISM surveys for Mar will provide a gauge of private sector growth momentum in the US. Manufacturing is expected to remain in contraction while services are expected to continue to expand moderately.
The RBA will meet this week. Some forecasters suggest that the RBA will raise by another 25bps to +3.85%, but current market pricing suggests a hold. The minutes of the latest RBA meeting noted that it agreed to reconsider the case for a pause at the upcoming meeting this week. At the last meeting, the softer Jan labor market report played into growth concerns (Feb employment was stronger). RBA Governor Lowe will also give his annual address at the National Press Club this week.
The RBNZ will meet this week and is expected to increase the policy rate by 25bps.
The global S&P PMIs for March will be released this week. The prelim PMIs (released last week) for Mar were encouraging, with stronger growth momentum across services helping to offset stalled momentum in manufacturing. There was a notable acceleration in services momentum, especially in Europe (France & Germany) and the US.
This week, the US Treasury will auction and settle approx. $251bn in ST Bills with a paydown of approx. $43bn.
The estimated net new money to be raised for Q2 is $278bn and the final US Treasury forecast for Q2 will be updated on 1 May.
QT: Approx $15.3bn 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
by Kim | Mar 27, 2023
Key events this week – Inflation; US, Europe, and Australia, US Fed speak, China PMIs
Recap from last week
The recent turmoil in the banking sector did not stop central banks from raising rates again last week.
The FOMC increased the FFR by another 25bps last week to 4.75-5%. The FOMC made several changes to the statement, emphasizing that the US banking system is ‘sound and resilient’. The main theme is the effect of bank failures is expected to result in tighter credit conditions for businesses and households with a high degree of uncertainty about these effects. FOMC guidance changed to “anticipates that some additional policy firming may be appropriate” which means that potentially tighter credit conditions may be enough to help slow inflation without further tightening from the Fed. The summary of projections for the path of rates was little changed from Dec (the median was unchanged at 5.1%) – with rates projected to stay high this year (cuts weren’t the “base case” this year).
There is now a large discrepancy between where market pricing and the FOMC see the path of the FFR for this year. Market pricing (as of 27 Mar) has shifted to a pause in May and June and cuts in the FFR after that. The economic projections imply further growth weakness through 2023 – reflected in an increase in unemployment by the end of the year (this projection was mostly unchanged from Dec). We are yet to see a turn in the data. For example, US initial claims remained very low last week at +191k.
The BoE hiked rates by 25bps last week. Inflation increased unexpectedly in Feb, but ‘remains likely to fall sharply’ over the rest of this year. The BoE noted that ‘uncertainties around the financial and economic outlook have risen’.
The SNB also increased rates by 50bps to 1.50%.
The RBA minutes noted somewhat weaker domestic conditions in Q4, and that sluggish growth may have continued into Mar. The softer Jan labor market report played into this growth concern (but the stronger Feb labor market report reversed that weakness). The RBA expects that inflation peaked in Q4 2022 and the Board agreed to ‘reconsider’ the case for a pause at the following meeting (next week).
The prelim PMIs for Mar were encouraging. Across the G4, stronger growth momentum across services helped to offset stalled momentum in manufacturing. There was a notable acceleration in services momentum, especially in Europe (France & Germany) and the US. Headline manufacturing momentum remained weaker but there were some small signs of renewed output growth. In Australia, momentum across services and manufacturing slipped into contraction.
Outlook for the week ahead
More inflation data is out this week. US PCE inflation is expected to increase by +0.2% over the month and by +5.3% over the year to Feb. Core inflation is expected to remain little changed at +4.7% over the year.
Euro Area prelim CPI for Mar is expected to increase by +7.2% over the year from +8.5% as higher energy prices in the base month will see the headline rate fall. But core CPI inflation is expected to increase to +5.7% in Mar.
The monthly Aus CPI (a new series) is expected to slow to +7.1% in Feb (from +7.4%). Aus retail sales are expected to increase by +0.4% in Feb after the stronger +1.9% increase in Jan. Both reports will be important inputs for the RBA next week.
Fed (central bank) speak is back this week with several speeches on the economic outlook and monetary policy. There will also be two days of testimony from Vice Chair Barr on bank oversight.
A big week in US Treasury issuance to round out month and quarter end – including the addition of two CMB’s. This week, the US Treasury will auction and settle approx. $495bn in ST Bills, CMBs, Notes, Bonds, FRNs, and TIPS, raising approx. $133bn in new money. This brings the estimated net new money raised for the quarter to $657bn (Treasury forecast; $932bn).
QT: Approx $50bn in ST Bills, Notes, and Bonds will mature and roll off the Fed balance sheet this week. Approx $14.5bn 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
by Kim | Mar 20, 2023
Key events this week – FOMC, BoE, and SNB monetary policy decisions, RBA minutes, prelim global PMIs for March
Recap from last week
Markets remained on tenterhooks last week, processing the fallout from bank failures. Global central bankers worked to contain contagion risk and ensure the smooth functioning of markets. This included the SNB stepping in to broker the sale of the beleaguered Credit Suisse. Global central banks later announced a coordinated response to “enhance the provision of USD liquidity” (announcement).
Last week, the ECB raised rates by 50bps as it previously signaled it would do. The policy decision acknowledged the context of an ‘elevated level of uncertainty’ and reiterated the importance of data dependence going forward (halting forward guidance). The ECB signaled it would address both price and financial stability, noting “the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy”. This decision sets the stage for the FOMC this week.
Markets are broadly expecting the FOMC to hike by 25bps as US CPI for Feb showed underlying inflation remained persistent. But some consider that a pause by the FOMC is not out of the question amid financial stability risks. Beyond this meeting, the uncertainty for the path of rates and economic projections has increased substantially and the FOMC is likely to acknowledge the high degree of uncertainty around its quarterly forecast update (SEPs). The summary of projections for rates will show any shift by the FOMC from its ‘higher for longer’ outlook on rates.
US data last week was mixed. US headline inflation continued to ease as energy and used car prices fell. This helped to offset the effect of accelerating shelter price inflation. The trends in underlying core and ‘super core’ measures showed that inflation momentum remained persistent.
As expected, US retail sales fell slightly in Feb after the much stronger growth in Jan. In real terms, retail sales growth continues to stall but the level remains above the pre-pandemic trajectory.
The first two US regional manufacturing surveys for Mar disappointed as activity continued to slow amid weakening orders. This month, stalling growth in employment and hours became more widespread. Employment declines are not yet at a point where they are widespread but it has begun to increase.
US housing indicators were again solid. Mortgage applications increased for a second week, housing starts and permits in Feb increased more than expected, and the NAHB homebuilder sentiment index increased again in Mar. It’s unclear whether this is a turning point for housing construction but at the very least, the fall seems to have slowed for now.
Outlook for the week ahead
It is likely to be another turbulent week with markets on edge. The main events this week will be the FOMC, BoE, and SNB policy meetings. The BoE is expected to increase rates by 25bps. The Feb UK CPI is out before the meeting and inflation is expected to remain elevated at +9.8%. The SNB was expected to increase rates at this meeting by 25bps.
The RBA minutes will be released this week. This should provide some background to the shift in guidance at the last meeting.
Finally, the Mar prelim S&P PMIs for the larger G4 economies will be released. Momentum is expected to be little changed across the manufacturing and services sectors of these economies.
This week, the US Treasury will auction and settle approx. $285bn in ST Bills, with a paydown of $13bn.
The US Treasury will auction the 20-year Bond and 10-year TIPS this week – both will settle next week.
QT: Approx $0.55bn in ST Bills will mature and roll off the Fed balance sheet this week. Approx $7.4bn 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
