by Kim | May 29, 2023
Key events this week – US Non-Farm Payrolls, Euro Area CPI May, Aus Monthly CPI
Recap from last week
The latest FOMC minutes showed uncertainty about the path of rates in the outlook and the extent to which further rate increases would be appropriate. Members noted the need for policy optionality. Views on the outlook diverged among committee members. Progress on reaching 2% inflation could be too slow so additional hikes could be warranted or, if the economy evolved according to some outlooks, then further policy firming may not be necessary.
Data so far had not ‘provided sufficient clarity’ for the policymaker’s next steps, so Governor Waller introduced a framework option for the next FOMC meeting; hike, skip, or pause. Skipping a meeting allows the Fed to hold rates, with the option to hike again, while maintaining a hawkish bias (given that progress on inflation is slow/stalling, and the labor market remains tight). Waller also noted that changes in credit conditions could be a deciding factor between hiking or skipping in June or July. One important factor could be the resolution of the debt ceiling and the resulting rebuild of the Treasury cash account tightening financial conditions.
By the end of the week, markets had priced in another US hike for Jun with cuts still commencing in Nov or Dec. This repricing was also in part due to the stronger US PCE inflation reading for Apr across headline and core measures, faster consumption growth in Apr, improvement in real disposable income growth, initial jobless claims that were revised lower, an increase in new home sales, and an acceleration in the May PMI activity led by services.
The prelim global PMIs for May were mixed. The headline manufacturing PMIs recorded a fourth month of slowing momentum, with Japan the exception. The US manufacturing PMI slipped back into contraction while output growth stayed positive. Services growth remained moderate, but momentum stalled across Europe, the UK, and Aus, while growth continued to accelerate in Japan and the US. The broader release of the May PMI’s will commence this week.
Outlook for the week ahead
The next FOMC meeting is 14 Jun, meaning this is the last week before the blackout period for that meeting. There are several Fed speeches scheduled this week with possibly more to be added. The US labor market data this week will be important as the FOMC determines the path forward for policy.
US non-farm payrolls for May are expected to increase at a slower pace of +180k (prior +253k). Participation is expected to remain unchanged while the unemployment rate is expected to increase slightly to 3.5%. Job openings for Apr are expected to fall to 9.3m (from 9.6m). The ISM manufacturing PMI will be released this week along with the Fed’s Beige Book overview of regional activity.
Other inflation data will be important this week. The Euro Area prelim CPI reading for May will be released and headline CPI is expected to remain elevated at +7% while core inflation is also expected to remain elevated at +5.5%. The ECB minutes will also be released this week.
Aus monthly inflation for Apr is expected to edge below +7%. RBA Governor Lowe will provide testimony this week ahead of the RBA meeting next week.
This week, the US Treasury will auction and settle approx. $431bn in ST Bills, Notes, Bonds, and TIPS, raising approx. $100bn in new money.
QT end of May/start of June: Approx $40.3bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $33.6bn in Notes, Bonds, and ST Bills will roll off the Fed balance sheet.
A deal to suspend the debt limit (through Jan 2025) has been reached. Details are now going into draft legislation with a vote expected around midweek. The estimated X-date was updated to a likely 5 Jun 2023.
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 | May 22, 2023
Key events this week – US PCE inflation, FOMC minutes, Prelim PMIs May, RBNZ policy decision
Recap from last week
In his speech last week, US Fed Chair Powell gave the strongest indication yet of a potential pause in the US rate hiking cycle. He noted that the stance of policy is restrictive and there are uncertainties regarding the lagged effects of the tightening done so far, including the additional tightening from recent “banking stresses”;
“Having come this far, we can afford to look at the data and the evolving outlook to make careful assessments,”
The justification to pause changes the focus to a forward-looking expectation that, due to long and variable lags, the full effect of policy tightening has yet to take effect (rather than a policy shift to a pause due to an obvious slowdown in the economy). After Powell’s speech last week, markets priced out the slightly higher probability of another hike in Jun.
Given that US inflation remains elevated, and the labor market remains tight, markets also started pricing out some of the near-term rate cuts and firmed up a pause through to Nov. US data last week showed the economy remained on a solid footing. US retail sales growth was positive albeit slower than expected – still reflecting a resilient consumer. Real retail sales have slowed and are shifting back toward the pre-pandemic trend. US manufacturing output growth was stronger in Apr, increasing by +1% over the prior month, led by motor vehicles, but also other durable & non-durable goods output. But the first two regional manufacturing surveys for May suggest some weakness in manufacturing could return. US housing activity, especially homebuilder sentiment, has continued to improve (led by the South and the West). Existing home sales were weaker in Apr. Importantly, the initial claims spike from last week was revised lower and claims fell back in line with the recent trend. Continuing claims remained stable.
Other global inflation data was mostly higher than expected. The BoC is still on a “hawkish hold” as Canadian headline inflation accelerated slightly to +4.4% in Apr and +0.7% over the month. The ECB has remained more hawkish with Euro area headline inflation confirmed at +7% in Apr and +0.6% over the month. Japanese CPI growth accelerated this month across headline and core measures. The BoJ preferred measure of inflation accelerated to +3.4% over the year with the monthly pace accelerating to +0.7% – the fastest monthly pace so far in this cycle.
The RBA minutes indicated that arguments were ‘finely balanced’ in deciding to hike by 25bps in May. After pausing in Apr, the Board was ultimately concerned about the upside risks to inflation and was buoyed by strong employment growth in Mar. The Aus data last week may weigh unevenly on the RBA decision next month; despite stronger than expected wage growth in Q1 of +3.7% (from +3.4% in Q4), employment for Apr was weaker than expected. The small decline in employment added to the increase in labor supply, resulting in a higher unemployment rate of 3.7% (from 3.5%). Signs of a weakening labor market will likely be a concern for the RBA.
Outlook for the week ahead
There will be continued headline risk from US debt ceiling negotiations this week and US Treasury Secretary Yellen is expected to provide an update on the ‘x-date’. Headline risk is likely to remain elevated, especially leading into the holiday long weekend.
US data will focus on inflation for Apr, housing, consumer income, spending, manufacturing, and growth momentum going into May. This will provide important input for assessing the path of the economy, amid expectations of an imminent slowdown. Headline PCE inflation is expected to ease slightly to +3.9% over the year while increasing over the month to +0.4%. Core PCE inflation is expected to be unchanged at +4.6% over the year. The final University of Michigan consumer sentiment reading for May will be released on Fri and will provide an update on the surprise spike higher in longer-term inflation expectations (up to +3.2%) reported in the prelim release.
There will also be several US Fed speeches throughout the week, including Governor Waller on the economic outlook.
The FOMC minutes of the May meeting will be released. This may provide some insight into discussions around the conditions for further hikes or for a pause in the hiking cycle. The minutes may also provide some insight into financial stability reports from staff.
The RBNZ will meet this week and it is expected to hike rates by another 25bps to 5.50%.
Finally, the prelim Global S&P PMIs will provide the first view of growth and activity momentum for May across key developed markets. The prelim May PMIs will be important in indicating whether stronger momentum, led mostly by services, has continued in Q2.
This week, the US Treasury will auction and settle approx. $322bn in ST Bills and FRNs, raising approx. $41bn in new money. The US Treasury will also auction the 2-year, 5-year, and 7-year Notes this week which will settle at the end of the month.
QT: Approx $14bn 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 | May 15, 2023
Key events this week – US Retail Sales, US Fed Chair Powell, Central Bank speeches, RBA Minutes, global CPIs for Apr; Canada, Japan, Euro Area
Recap from last week
There was a small deceleration in annual US inflation for Apr. Inflation remains high with headline CPI growing at +5% and core CPI at +5.5%. The more recent 3mth and 6mth annualized time frame shows that headline inflation continues to ease. But this is less so the case for core CPI with recent time frames still showing persistent inflation pressure. Some of the underlying changes in the CPI were more positive this month with a further slowdown in the trend of the monthly shelter price growth. Will it continue? Slowing shelter price growth is central to most forecasts for overall slowing inflation.
The trimmed mean inflation has remained elevated through this cycle so far, suggesting that inflation pressure has been broad across expenditure categories. While the annual trimmed mean inflation rate slowed only slightly to +6.1% in Apr, the monthly rates have been slowing more consistently and the 3mth annualized rate is now down to +4.2%. This may indicate that broader inflation pressure has eased faster over the last few months.
But other data pointed to slower progress on inflation. Last week, the University of Michigan consumer inflation expectations over five years increased to +3.2% – the highest in over a decade. The Atlanta Fed wage data for Apr showed wage growth remained at an elevated level.
Was this CPI report enough for the FOMC to pause next month? Markets say yes for the moment – but there is still a lot of data before the next meeting. The challenge for the FOMC will be getting persistent inflation down to the 2% target without any further tightening and especially while the labor market remains tight.
Still, the first interest rate cuts remain priced in for Sep – indicating that the US economy is expected to weaken. Some data last week added weight to this outlook. Growth in initial claims shifted notably higher to +264k. But it was alleged that fraud was driving some of the increase in claims (Source; Bloomberg). The other report was the loan officer survey. While the survey showed no shift up to a ‘considerable’ tightening in credit conditions (resulting from the recent bank failures), credit conditions have continued to tighten and some demand for credit has slowed further. This provides a headwind for the growth outlook.
Outlook for the week ahead
The most recent US PMIs indicated that momentum improved somewhat in the US in Apr, so data this week will be about confirming that shift in momentum going into Q2. Retail sales growth is expected to increase to +0.7% in Apr, supported by stronger growth in motor vehicle sales. Overall US industrial production for Apr is expected to remain flat/weaker at -0.1%. The first regional manufacturing surveys for May will provide some insight into the trend in manufacturing activity. There will also be important housing data. Existing home sales for Apr are expected to slow to 4.3m (annualized rate), while home builder sentiment for May is expected to stay unchanged. New permits and starts for Apr are expected to be little changed.
There will be a lot of central bank-speak this week. This will include a discussion between US Fed Chair Powell and former Fed Chair Ben Bernanke on Friday. US Fed Vice Chair for Supervision Barr will also give two days of testimony.
More global inflation data for Apr will be reported this week. Canada’s CPI is expected to slow to +3.7% over the year, but increase to +0.9% over the month. Japan’s CPI ex fresh food is expected to stay elevated at +3.1%. The Euro Area headline inflation for Apr is expected to be confirmed at +7% over the year and +0.7% over the month.
Finally, the RBA will release the minutes of the last meeting, and this should provide insight into the decision to increase rates after deciding to pause at the prior meeting. The important Aus wage growth data for Q2 will be released and wage growth is expected to accelerate to +3.6% and by +0.9% QoQ. The Aus labor market survey for Apr will also be released and net employment growth is expected to slow to +25k, while participation (66.7%) and unemployment (3.5%) remain unchanged.
Headline risk around debt ceiling negotiations will remain elevated.
This week, the US Treasury will auction and settle approx. $436bn in ST Bills, Notes, and Bonds, raising approx. $31bn in new money. The US Treasury will also auction the 20-year Bond and 10-year TIPS this week – both will settle at the end of the month.
QT: Approx $48bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $29bn in Notes & Bonds will mature on the Fed balance sheet this week 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 | May 1, 2023
Key events this week – Central bank decisions; FOMC, ECB, and the RBA, US non-farm payrolls, Eurozone CPI, global PMI’s Apr
Recap from last week
Data continued to highlight slower US growth momentum while core inflation remained persistent.
US real GDP growth slowed notably in Q1 to +1.1% (expecting +2%). Growth has been slowing over the last two quarters and is expected to underperform given the stage of the tightening cycle. In Q1, personal consumption expenditure made a larger positive contribution to GDP growth, but this was offset by stalling inventory growth. The recent decline in domestic investment expenditure slowed, which was positive, partly due to a slower decline in residential investment. Net exports made a smaller contribution to growth even as both exports and imports increased over the quarter.
Inflation and wage growth pressures persisted into Mar. The headline PCE inflation slowed as energy prices continued to fall and food inflation also slowed further. But measures of core inflation were little changed at +4.6% in Mar (from +4.7% in Feb). The trimmed mean PCE inflation was unchanged at +4.7% in Mar highlighting that price pressures remain broad. As a measure of wage growth, the Employment Cost Index (ECI) growth accelerated slightly over Q1. Over the year, the ECI growth slowed to +4.8%.
The monthly PCE data places a question mark over the strength of US household expenditure growth in Q1 GDP though. The increase in the quarter was led mostly by the peak in Jan. Through Feb & Mar, real expenditure was flat to slightly down compared to Jan, suggesting a loss of momentum towards the end of the quarter. Expenditure growth was supported by real disposable income growth led by the large increase in non-farm payrolls in Jan, cost of living adjustments for transfer payments (Jan), wage growth, and slower headline inflation. Personal savings (surplus of income over spending) continued to recover over the quarter and to a greater degree in Feb and Mar. Some of these positive income effects may fade and there is likely some caution building amid negative news on the economy.
Despite the slowdown in growth, US initial claims show little sign of weakening yet with new claims falling last week to +230k (expecting a slight increase to +250k) while continuing claims were unchanged at the higher level. US new home sales increased more than expected and mortgage applications also increased.
Aus quarterly CPI showed inflation slowing but remaining elevated at +7%. It will likely be enough of a slowdown for the RBA to keep rates on hold again this month. Much of the disinflation to date has come from tradable/goods categories (petrol prices) while domestic/non-tradable inflation continued to increase.
Outlook for the week ahead
This will be a big week of central bank meetings and important economic data. These are the highlights for the week;
The FOMC is expected to hike rates again by 25bps. This will bring the FOMC in line with its SEP expectation of a peak in rates for this cycle. The FOMC may indicate a pause from here – balancing slower growth momentum and persistent inflation which will likely require rates to stay higher. Markets continue to price in cuts for later in the year.
US labor market data will feature this week, including non-farm payrolls at the end of the week. Payroll growth is expected to slow to +180k this month, while unemployment is expected to remain at a low of 3.5%. JOLTS data for Mar is expected to show a fall in job openings to 9.6m. This is effectively the FOMC soft landing scenario of slowing payroll growth without a meaningful rise in unemployment. The US ISM surveys for Apr this week will provide a view of growth momentum across manufacturing and services going into Q2.
The ECB is expected to increase rates by 25bps this week. The Euro area prelim CPI for Apr will be released before the ECB meeting. Headline inflation is expected to remain extremely high at +0.9% over the month, but slowing to +7% over the year. Core inflation is also expected to remain extremely high at +1.1% over the month and +5.7% over the year.
The RBA is expected to keep rates on hold as inflation begins to slow. RBA Governor Lowe will also speak after the board meeting at a scheduled event.
Global PMIs for Apr will be released this week, providing some broader context of growth momentum going into Q2.
This week, the US Treasury will auction and settle approx. $477bn in ST Bills, CMBs, Notes, FRNs, and Bonds, raising approx. $46bn in new money.
The US Treasury quarterly financing estimates for Q2 and Q3 will be released this week (1st and 3rd May).
QT: Approx $33.7bn 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 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
