by Kim | Mar 13, 2023
Key events this week – US CPI and retail sales, ECB decision, China data, and Aus labor market
A turbulent week of shifting US monetary policy signaling was capped off by the seemingly rapid collapse of two US banks. Over the weekend, the US Federal Reserve, US Treasury, and the FDIC announced a comprehensive backstop for depositors of the failed banks, and for depositors in the US financial system more broadly, to avoid wider potential funding issues.
Earlier in the week, US Fed Chair Powell’s testimony surprised markets by signaling a willingness to reconsider an increase in the pace of hikes, “if the totality of data were to indicate that faster tightening is warranted”. After the CPI revisions in Jan, the FOMC became concerned that they had not made as much progress on inflation as they had thought.
Since that testimony, broader concern over the financial system has created a greater level of uncertainty for the path of rates. After a round trip during the week, markets are back to pricing a +25bps increase (at the time of writing), and a small probability that the FOMC may pause hikes next week. In this context, the US CPI report on Tuesday is likely even more important to the FOMC and how it may need to address both financial stability and inflation concerns. In light of this heightened uncertainty, there is a risk that the FOMC provides some policy signaling during the blackout period, should there be a need to shift market expectations ahead of the meeting on 21-22 Mar. Despite the blackout period, there is a speech by Board of Governors member Bowman scheduled on Tuesday in Hawaii after the CPI report.
Recap from other events last week
Growth in US payrolls slowed in Feb but remained elevated even after the larger increase in Jan. The trend in slower payroll growth has seemed to stabilize over the last few months. Overall, the US labor market remains strong. Since Nov 22 there has been a further improvement in the participation rate (LFPR) and in Feb, the LFPR for the core working age group reached its pre-pandemic level for the first time in this recovery. While the unemployment rate ticked up in Feb, the demand for labor has mostly absorbed the increase in supply over the last few months. Hours growth remained stalled in Feb while manufacturing overtime hours continued to fall. The average hourly earnings ex-bonus accelerated to +4.6% over the year, while slowing slightly over the month to +0.2%.
US initial claims increased to over +200k last week and this may be something to watch. While the increase in initial claims was concentrated in New York for wk ending 4 Mar, there was a corresponding increase in continuing claims for wk ending 25 Feb – and this data lags initial claims by a week.
The RBA increased rates by a further 25bps to 3.60% and signaled in a speech later that “we are closer to the point where it will be appropriate to pause” and assess the cumulative impact of increases. The RBA cited peaking inflation and shifted its reference to a slowdown in household spending. This week, the Aus labor market report for Feb is expected to remain strong with a +48k increase in employment and a further tick lower in the unemployment rate to 3.6%.
Outlook for the week ahead
It’s still a big week of important US data, including the Feb CPI and retail sales. US CPI for Feb is expected to increase by +0.4% over the month in Feb (from +0.5% in Jan) and by +6% over the year (from +6.4% in Jan). Core inflation is expected to be unchanged at +0.4% over the month and slowing slightly to +5.5% over the year. Other US pricing data out this week includes the PPI and export/import price indexes for Feb.
US retail sales are expected to slow by -0.3% in Feb after a stronger increase of +3% in Jan.
US manufacturing and output data will include the first round of regional Fed manufacturing surveys for Mar. US industrial production for Feb is expected to increase by +0.4% in Feb after no growth in Jan.
The ECB meets on monetary policy this week. The Governing Council has previously signaled a +50bps increase is to be expected at this meeting. Eurozone inflation remains elevated and core inflation continues to increase. The final revision of Q4 GDP released last week showed a slight contraction in GDP for the Eurozone by -0.1%. Falls in consumption and private investment in Q4 were somewhat offset by a larger contribution from net exports (falling imports). This may affect ECB guidance. The ECB has also started QT this Mar and is expected to continue through to Jun at the initial lower rate.
Data out of China for Jan-Feb will be released providing some insight into the rebound in investment, production, and retail sales.
Finally, the BoJ will release the minutes of the last meeting for Governor Kuroda.
This week, the US Treasury will auction and settle approx. $351bn in ST Bills, Notes, and Bonds, raising approx. $46.1bn in new money.
QT: Approx $8bn in ST Bills, Notes, and Bonds will mature and roll off the Fed balance sheet this week. Approx $10.5bn 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 6, 2023
Key events this week – US non-farm payrolls, US Fed Chair Powell testimony, central bank decisions; RBA, BoC, and BoJ
Recap from last week
The global S&P PMIs provided a broad reading of momentum for Feb.
The global composite output PMI recorded a further acceleration in output growth – the highest reading since Jul 2022. This improvement in momentum was led by a further expansion in the global services output index. The global manufacturing output PMI also showed an improvement in momentum, albeit smaller than for services, reaching a neutral 50 level. Manufacturing performance was still mixed despite the headline improvement. Conditions worsened across larger manufacturing countries; France, Japan, and Germany.
In the US, the question has been how much of the stronger momentum in Jan will be sustained. So far, the Feb ISM PMIs indicated no change to the momentum recorded in Jan. The ISM services PMI showed continued moderate expansion as domestic and export orders rebounded. Services inflation remained sticky. The ISM manufacturing PMI remained in a mild contraction. Production contracted further as weak orders were not offset by another fall in backlogs. Price increases became more widespread again.
US Fed Governor Waller’s speech suggested that the Jan revisions to the CPI showed that the FOMC may not have made as much progress on inflation as expected. Waller’s comments provide a guide; if payrolls and inflation data go back to the pre-Jan downward trajectory, then this endorses the current (Dec) SEP for the FFR of between 5.1-5.4%. If data comes in higher/hotter, then the projection for the target range may need to be increased.
Euro area CPI came in higher than expected for Feb at +8.5%, with the monthly pace increasing by +0.8%. Core CPI for Feb was also higher at +5.6%, up from +5.3% in Jan. The monthly core CPI also came in at +0.8%.
Outlook for the week ahead
The first of the important US Feb data will be released this week, leading up to the FOMC meeting on 21-22 Mar.
Growth in US payrolls is expected to slow to +210k in Feb (from +517k last month). The unemployment rate is expected to remain at a low of 3.4%. Other labor market indicators include JOLTS for Jan and the Challenger report for Feb.
US Fed Chair Powell will provide two days of testimony this week (the semi-annual report to Congress). He may mirror some of what Waller has said – that rate projections may need to move higher if data continues to strengthen.
The RBA is expected to increase rates by a further 25bps to 3.60%. Aus growth slowed by more than expected in Q4 with weakness in domestic consumption and investment. The headline monthly inflation (new series) for Jan eased to +7.2%. Retail sales growth was stronger for Jan but remained in a slower growth trend.
The BoC is expected to keep rates on hold, with the policy rate at 4.5%.
The BoJ will meet this week and policy settings are expected to be unchanged, as this will be Governor Kuroda’s last meeting.
This week, the US Treasury will auction and settle approx. $276bn in ST Bills with a net paydown of -$33bn. The US Treasury will also auction the 3 and 10-year Notes and the 30-year Bond this week – all will settle next week.
QT: Approx $0.8bn in ST Bills will mature and roll off the Fed balance sheet this week. Approx $10.4bn 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
by Kim | Feb 27, 2023
Key events this week – US ISM PMIs, global S&P PMIs, Eurozone prelim CPI, Aus; monthly CPI, retail sales, & GDP Q4
Recap from last week
US data mostly confirmed a firming of near-term economic momentum in Jan with a view that this momentum may extend beyond Jan. Rates markets were expecting a slowdown in activity which has yet to materialize more broadly. Current US FFR probabilities are now more in line with the December FOMC ‘dots’, with the FFR peaking around 5.25-5.5% and no cuts for 2023. So far, long rates have remained below last year’s peak.
But there is a large question over how much of the stronger momentum in US consumption and employment data for Jan was due to ‘seasonal factors’. So, it’s the US Feb data in the following two weeks that may provide important confirmation; payrolls (10 Mar), CPI (14 Mar), and retail sales (15 Mar), all leading up to the FOMC on 21-22 Mar. The Feb US CPI and retail sales reports will be released in the blackout period before the FOMC meeting.
US PCE inflation data for Jan was stronger than expected and broadly showed that progress on disinflation had stalled. The monthly and quarterly pace of inflation increased across the headline, core, super-core, median, and trimmed mean inflation numbers. The quarterly trends show that inflation remains sticky. The FOMC will be disappointed but not surprised. The FOMC minutes were clear that “the historical record cautions strongly against prematurely loosening policy” and that “substantially more evidence of progress across a broader range of prices would be required” before declaring inflation was on a ‘sustained downward path’.
Stronger US income growth in Jan supported higher consumption growth and a further increase in the saving rate. US initial claims remained low and below 200k. But weekly mortgage applications fell hard as mortgage rates increased. Regional manufacturing themes remained focused on the weakness in demand, difficulty finding skilled labor, and inflation.
The Feb prelim PMIs were important, indicating an improvement in growth momentum especially across services and manufacturing output. The contraction in US manufacturing output eased, indicating some positive momentum. US services shifted back to expansion in Feb. Overall, manufacturing output shifted back into growth across the Eurozone and the UK but remained weaker in Japan. Services output improved to a more moderate pace of expansion across the G4.
The RBA minutes reflected a shift away from considering a pause in rate hikes – only a 25 or 50bps increase was debated. The guidance appears to be preparing markets for at least another 40bps increase in hikes – and that may be why the “not on a pre-set path” statement was removed last month. This week, Aus monthly CPI is expected to slow to +8.1% in Jan, retail sales growth is expected to rebound by +1.2% in Jan, and GDP in Q4 is expected to increase by +0.9% (QoQ).
Outlook for the week ahead
US survey data for Feb will be a guide for growth momentum in the lead-up to the next few weeks of key Feb data. The US ISM PMIs for Feb are expected to show continued expansion in services, while the softness in manufacturing is likely to persist. There will be several other Feb regional manufacturing surveys released. Initial claims are expected to stay low at +197k. There will be several Fed speeches including Governor Waller on the economic outlook.
Europe; The prelim Eurozone CPI for Feb is expected to ease to +8.2% in Feb. The ECB minutes will be released this week.
Global PMI’s for Feb will provide a broader view of any change in growth momentum.
This week, the US Treasury will auction and settle approx. $438bn in ST Bills, Notes, and Bonds, raising approx. $70.8bn in new money.
QT: Approx $29bn in Notes, Bonds, and ST Bills will mature and roll off the Fed balance sheet this week. Approx $47bn in ST Bills, Notes, and Bonds 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 | Feb 20, 2023
Key events this week – FOMC & RBA Minutes, RBNZ policy meeting, US PCE inflation, Japan & Canada CPI, prelim PMIs Feb
Recap from last week
US consumer price inflation came in as expected, with headline inflation slowing only slightly while underlying inflation remained sticky. Persistent inflation, together with stronger retail sales and payroll growth in Jan, was another data point adding to questions about more resilient momentum in the US.
US CPI slowed only slightly to +6.35% as higher energy prices added to inflation pressure this month. Core goods remained a larger disinflationary force – led by declining used car prices. Core services remained inflationary – led by rising shelter costs. Measures of underlying CPI showed the path of inflation remaining sticky. Notably, the Cleveland Fed median at +7% and trimmed mean at +6.5% showed little progress in reducing underlying inflation. The Jan CPI report confirms the FOMC’s concern about prematurely loosening policy. Rates markets continued to reprice a ‘higher for longer’ scenario. This was also stoked by hawkish rhetoric from Fed officials during the week.
But not all sectors line up with the softer landing narrative. US industrial production rebounded in Jan but is yet to break the weaker trend in output growth. The first regional manufacturing surveys for Feb showed continued weakness in orders and activity. In both surveys, hours worked were reduced, and employment in the NY Empire State survey contracted for the first time since the start of the pandemic. New home builder sentiment was stronger in Feb (off very low levels) – but hard to see that continue if mortgage rates shift higher again. The latest weekly mortgage applications reversed sharply lower as rates moved higher. US housing starts remained in a firm downward trend.
RBA Governor Lowe’s testimony noted that “there’s risks that we haven’t done enough” to tighten and bring down inflation. Employment in Jan was again weaker than expected and the unemployment rate increased from an all-time low to 3.7%. The RBA is looking through this weaker Jan report, citing data that more people than usual are waiting to start work in Feb. The RBA is expecting a strong rebound in employment in Feb, but if not, Governor Lowe noted that it “may force a rethink on the state of the economy”. The Aus Feb consumer sentiment reversed the Jan gains – sentiment on the state of family finances versus a year ago is now that the lowest level since the 1990s recession.
Outlook for the week ahead
It will be a big week of data to round out the near-term view of momentum.
US PCE inflation is expected to accelerate over the month to +0.5% with annual headline PCE inflation to slow to +4.9%. Personal income is expected to increase by +0.9% in Jan and spending by +1.3%. Initial jobless claims are expected to rise slightly to +200k.
FOMC minutes will be released this week. The FOMC reduced the hike to 25bps at the last meeting. Markets had reacted favorably to the message that disinflation was underway, and that there was little pushback over concern about easier financial conditions. Rates pricing has moved notably since then due to stronger data.
The RBA minutes will also be released this week. Some expected a pause at the Feb meeting, so the minutes may highlight more detail about the decision to hike and the thinking behind changes to the statement.
RBNZ monetary policy decision – markets are expecting a +50bps hike to 4.75%.
The Japanese core CPI ex fresh food for Jan is expected to increase to +4.2%. A confirmation hearing will take place later in the week for the new BoJ Governor nominee.
The latest prelim PMIs for Feb will provide insight into changes in growth momentum among the G4.
This week, the US Treasury will auction and settle approx. $335bn in ST Bills and FRNs with a net paydown of approx. -$3bn.
The US Treasury will also auction the 2, 5, and 7-year Notes this week. All will settle on 28 Feb.
QT: Approx $18bn 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 | Feb 13, 2023
Key events this week – US CPI, retail sales, production, and housing data, UK CPI, RBA Governor Lowe’s testimony
Recap from last week
The stronger US nonfarm payrolls were a catalyst for a shift in the narrative last week. Markets have been digesting the stronger US labor market data, an expected increase in inflation this week, and growth that generally hasn’t been as bad as expected. Yields increased last week and the FFR futures are mostly back in line with projections provided at the Dec FOMC meeting.
In an interview during the week, US Fed Chair Powell noted that the disinflation process has started, but is in the very early stages and that the process will take time. Chair Powell does “expect significant progress on inflation this year and it’s our job to produce it”. So far, the disinflation process has not happened at the expense of higher unemployment.
The US senior loan officer survey for Q4 confirmed broadly tighter lending standards and lower demand for credit. The US consumer credit growth for Dec was notably slower. This was partly the result of lower growth of non-revolving credit linked to slower growth of motor vehicle sales in Dec (motor vehicle sales rebounded in Jan). Initial claims are still below 200k but NSA continuing claims appear to be edging higher. The Atlanta Fed wage growth tracker for Jan showed some easing in wage growth over the year, but the pace of growth remains elevated.
The RBA increased the cash rate target by 25bps to 3.35%. Inflation is high and Q4 core inflation at 6.9% was higher than expected. The labor market is tight, and unemployment remains at its lowest level since 1974. Rising rates are starting to impact household budgets and house prices. The guidance noted that “further increases in interest rates will be needed in the months ahead”. A key phrase, ‘rates not on a pre-set path’ was removed from the statement, and when previously added, it was thought to be a precursor to a pause in the hiking cycle.
RBA Governor Lowe has been criticized for earlier statements that rates wouldn’t increase until 2024. Household mortgage rates and payments are now resetting higher and community backlash has increased. This week, Governor Lowe will provide testimony in front of the Senate and House of Representatives economics committees.
Outlook for the week ahead
US CPI will set the tone for the week.
US Headline CPI in Jan is expected to slow to +6.2% over the year (from +6.5% in Dec). The monthly change in CPI is expected to increase to +0.5% in Jan (from +0.1% in Dec). Core CPI is expected to increase by +0.4% over the month, unchanged from Dec.
Other data this week may highlight some near-term improvement in US momentum. Monthly US retail sales growth is expected to rebound in Jan by +1.6% after falling -1.1% in Dec. Similarly, industrial production is expected to increase by +0.5% in Jan after a -0.7% fall in Dec. The first regional US manufacturing surveys for Feb will provide some insight into the persistence of weaker manufacturing activity. US homebuilder sentiment is expected to lift slightly. There will be several US Federal Reserve speeches during the week.
Inflation in the UK is expected to slow to +10.2% in Jan. Monthly CPI is expected to fall by -0.4%. UK labor market data will also be released this week.
The Aus labor market data for Jan will be released. Employment is expected to increase by +20k while the participation rate and unemployment rate are expected to be little changed at 66.6% and 3.5% respectively.
This week, the US Treasury will auction and settle approx. $400bn in ST Bills, Notes, and Bonds raising approx. $96bn in new money.
The US Treasury will also auction 30-year TIPS and 20-year Bonds this week. Both will settle on 28 Feb.
QT: Approx $53bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $32bn in Notes and Bonds will mature on the 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 | Feb 6, 2023
Key events this week – Central bank speeches including Fed Chair Powell, RBA monetary policy decision.
Recap from last week
As expected, the FOMC increased the FFR target by 25bps. Guidance was unchanged and the main points were clear; “ongoing increases will be appropriate” and “it is our judgment that we’re not yet at a sufficiently restrictive policy stance”. The disinflationary process is at an early stage and more work needs to be done. Chair Powell noted that the ‘super core CPI’ highlighted in his Brookings speech was unchanged and sticky. The FOMC will need to stay the course, won’t loosen policy prematurely, and will likely need to maintain a restrictive stance for some time. Yet, markets saw a green light when Chair Powell did not push back (unlike at Jackson Hole) when asked whether recent easing in financial conditions would make the job harder to bring down inflation.
The significantly stronger non-farm payrolls for Jan quickly shifted the narrative. The Jan non-farm payrolls increased by +517k jobs – well above even the highest estimates. Most of the job gains were in services, but goods-producing payrolls also increased at an above-average pace. The unemployment rate remained low or little changed (25-54 years) despite a larger increase in participation (mostly across the core working age group). Other labor market indicators remained strong; job openings were higher, ECI growth slowed but remained elevated at +5.1%, and initial claims remained low despite larger layoff announcements. For now, the stronger labor market conditions provide scope for further tightening if inflation stays persistent.
The US ISMs for Jan were mixed. Manufacturing activity remained subdued while services activity rebounded strongly in Jan. Prices were stickier across both sectors this month.
The ECB and BoE increased rates by 50bps. The ECB signaled its intention to hike another 50bps in Mar before “evaluating the subsequent path of our monetary policy”. Euro area CPI eased back to +8.5% as energy prices continued to fall while core CPI accelerated to +5.2%. The BoE noted that if price pressure persisted, then further tightening in monetary policy would be required. Inflation in the UK remains extremely elevated but is expected to “fall sharply” over the rest of the year. This week, UK Q4 GDP growth is expected to be flat at 0% after falling by -0.3% in Q3.
The Jan global PMIs were more encouraging. The output contraction eased to only a subdued pace of decline. Manufacturing activity “moved closer to stabilization” and services activity rebounded, especially through the Eurozone. Input price inflation increased at a faster pace across both sectors, while optimism lifted regarding future output growth.
Outlook for the week ahead
A light data week.
Speeches by central bankers will feature in the outlook this week. US Fed Chair Powell will take part in a discussion at the Economic Club of Washington. Other US Fed speeches include Governor Waller, NY Fed President Williams, and Philadelphia Fed President Harker.
We will continue to watch high-frequency US data. Initial claims remain an important early indicator amid elevated job cut announcements. Claims are expected to increase slightly to +194k this week. Similarly, the recent bounce in mortgage applications reversed sharply last week (adjusted for the prior shorter holiday week) despite falling mortgage rates.
The RBA is expected to increase the cash rate by 25bps this week. Inflation accelerated in Q4, coming in higher than expected, while the labor market remains resilient. The RBA will stay concerned and vigilant over the impact of rising rates on household spending and housing.
Last week, the US Treasury borrowing requirement (net cash) for Q1 was increased notably from $578bn to $932bn. This increase is reflected in the higher issuance of ST Bills for the quarter. The estimated Net Bill issuance for Q1 was revised to $655bn (from $301bn) and the estimated Net Coupon issuance over the quarter remained unchanged at $277bn (prior was net $300bn). The expected cash balance at the end of Q1 was unchanged at $500bn. The revised higher issuance for Q1 was the result of a lower-than-expected cash balance at the end of Q4 2022 and a projection of lower tax receipts and higher outlays over Q1.
This week, the US Treasury will auction and settle approx. $279bn in ST Bills raising approx. $60bn in new money.
The US Treasury will also auction the 3-year and 10-year Notes and the 30-year Bond this week. All will settle next 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
