by Kim | Aug 8, 2022
Key events for the week ahead – US CPI
Recap from last week
US Fed speeches walked back market interpretations of a Fed ‘pivot’ from the last FOMC meeting. Speakers remained hawkish, signaling their commitment to bring down inflation, that there was ‘still a long way to go to reach the price stability target of 2%’, and that the Fed was looking for “compelling evidence” of inflation slowing.
Stronger US data helped to offset the emerging recession narrative. This was led by higher-than-expected growth in non-farm payrolls for Jul of +528k (versus +250k expected). Average hourly earnings also increased by more than expected. The household employment survey was mixed; employment growth was positive, but low for the month. The unemployment rate still declined to 3.5% because more people left the labour market. Initial claims continued to edge slightly higher.
The Jul US ISM PMI surveys diverged. The manufacturing PMI recorded a further, albeit slight slowdown in momentum (similar to the S&P PMI). Manufacturing demand contracted led by domestic orders while new export orders rebounded. The ISM Services PMI recorded improved momentum as growth in orders and output were more widespread in Jul. This is in stark contrast to the S&P services PMI which recorded a sharp contraction in the US services sector in Jul.
The BoE surprised markets by increasing the bank rate by a further 50bps. It was also a notable meeting in that the inflation forecast was upgraded to peak around +13% in Q4 2022 and the BoE announced that it expects the UK to enter a recession from Q4 2022. The BoE staff presented a strategy for the outright sale of UK Gilts held on the BoE balance sheet. This program will be voted on at the Sep meeting and is likely to begin shortly thereafter. This week, UK Q2 GDP will be released, and the economy is expected to contract by -0.2% in Q2.
The RBA increased the cash rate target by a further 50bps last week. There was little in the way of guidance other than further normalization is to be expected in the coming months due to high inflation. The Board needs to see elevated inflation come down (forecast to take about 2 years to get back to the 2-3% range) to the target but is intent on keeping the economy ‘on an even keel’.
The Jul S&P PMIs reflected slower growth momentum in manufacturing and services activity in many developed markets. There were notable falls in headline PMIs in US services (-5.4pts), Mexico manufacturing (-3.7pts), Taiwan manufacturing (-5.2pts), and Japan services (-3.7pts).
The week ahead
Inflation will be the key theme this week. The US Jul CPI report will be one of two CPI reports before the next FOMC meeting in Sep. Inflation data generally, will be important in the context of the next steps for the path of rates in the US and will be closely monitored over the next six weeks. The expectation is for Jul CPI to have slowed to +8.7% (from +9.1% in Jun). The monthly growth will be closely watched with CPI expected to increase by just +0.2% in Jul after increasing by +1.3% in Jun. Core measures of CPI are expected to stay elevated at +6.1% over the year and +0.5% for the month. Fed speeches after the CPI release are expected. The prelim Aug University of Michigan consumer sentiment, including inflation expectations, and Q2 unit labour costs will also be released this week.
There will be other measures of inflation reported this week with four European final CPI reports for Jul (Germany, France, Italy, and Spain), China CPI for Jul, and Aus consumer inflation expectations for Aug.
This week, the US Treasury will auction and settle approx. $265bn in ST Bills, raising approx. $40bn in new money.
The US Treasury will also auction approx. $98bn in 3yr and 10yr Notes and 30yr Bonds – which will settle next week.
Approx. $22bn in ST Bills will mature on the Fed balance sheet this week and will be rolled over.
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 | Jul 31, 2022
Key events for the week ahead – Global PMIs for Jul, BoE and RBA decisions, and US non-farm payrolls
The FOMC raised the FFR target by 75bps to 2.25%-2.5%. The FOMC has followed its plan to increase rates ‘expeditiously’ to the ‘neutral’ rate. In a highly contentious statement, Chair Powell said that the neutral level had probably been reached after the Jul hike. The Fed will take a measured approach to the next rate increases, as the FFR likely starts to increase into more restrictive territory. Some saw this decision as a pivot, especially compared to the overtly hawkish tone in the Jun meeting (after the May CPI shock when the Fed was seen as behind the curve and notably upped its hawkish rhetoric). Still, the FOMC stated that another ‘unusually large’ hike could be appropriate, depending on the data. At the very least, ongoing increases are still appropriate.
The FOMC acknowledged a willingness to accept a period of ‘below-trend’ growth in the short term to achieve lower inflation over the long term. Soft demand isn’t going to get the Fed to pivot unless there is a material deterioration in the labour market. And inflation is yet to fall – although easing in inflation is expected now that energy/commodity prices have fallen from recent peaks. With greater data uncertainty, FOMC guidance has been reduced. We continue to focus on Fed speak/signaling, inflation, labour market indicators, and broader growth momentum going into the next meeting.
US data last week showed another decline in Q2 GDP (advance release). The slowdown was more broad-based than the decline in Q1. The PCE inflation for Jun though, surprised to the upside with a strong increase in the month of +1% (up from +0.6% in May) and the annual rate increasing to +6.8% from +6.3% in May.
US data this week will provide a good overview of the US labour market. Non-farm payrolls for Jul are expected to increase at a slower pace of +250k. The unemployment rate is expected to remain at 3.6% with little/no change in participation at 62.2%. Initial claims will be watched closely – which were revised higher in prior weeks and is now up to +250k/week. JOLTS data for Jun will also be released. On the growth front, the ISM surveys for Jul will be in focus – especially after the weaker flash US PMIs (output). Regional manufacturing surveys in Jul have been mostly stable after the deterioration in Jun, but there are pockets of weakness.
It was mixed news for the ECB with faster growth in Q2 but higher inflation. Euro area Q2 GDP growth surprised to the upside, increasing by +0.7% (expecting +0.1%) versus +0.5% in Q1. But Germany’s GDP growth slowed to 0% in Q2. The Euro area flash inflation for Jul was higher than expected at +8.9% (expecting +8.7%) versus +8.6% in Jun. But the monthly growth slowed notably to +0.1%. Similarly, Euro area core CPI accelerated to +4% from +3.7% in Jun, but the monthly pace declined by -0.2%. This week, a further read on growth momentum from the Jul PMIs, retail sales, and Germany factory orders and industrial production.
The BoE is expected to increase rates by a further 25bps this week. UK inflation is still elevated at +9.4% in Jun having accelerated from +9.1% in May.
The RBA is expected to increase rates by a further 50bps this week. Headline CPI came in slightly lower than expected at +6.1% (expecting +6.3%), but still higher than the +5.1% inflation recorded in Q1. Measures of core CPI also accelerated to over 4% and well above the target band of 2-3% inflation. Aus economic activity and the labour market have remained resilient, while there have been some signs of softening in the housing market. The RBA is expected to release its latest inflation forecasts in the Statement on Monetary Policy.
This week, the US Treasury will auction and settle approx. $398bn in ST Bills, Notes, Bonds, and FRNs raising approx. $47bn in new money. Approx. $21bn in ST Bills will mature on the Fed balance sheet this week and will be rolled over.
The revised US Treasury Q3 refunding schedule and the estimate for Q4 will be released this week on 3 August 2022. Overall financing estimates will be released on 1 August 2022.
Quantitative Tightening Overview – August 2022
This is the final month of the lower $30bn cap on the decline in Treasury Securities on the Fed balance sheet. This cap increases to $60bn in September.
Approx. $111.4bn in SOMA Coupons will mature this month (15 and 31 Aug). Of the $111.4bn, a total of $30bn (the cap) will be redeemed and the remaining $81.4bn in maturing Coupons will be reinvested. Given that the value of Coupons maturing is greater than the redemption cap this month, Bills maturing in August will be rolled over/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 | Jul 25, 2022
Key events for the week ahead – FOMC monetary policy decision, US and Euro area Q2 GDP growth, and inflation data
Recap from last week
There were several notable parts of the ECB decision last week. The ECB increased its key interest rates more than expected by 50bps, to ‘front-load’ increases, and noted that further normalization of monetary conditions would be appropriate given the updated inflation assessment. The ECB announced its ‘anti-fragmentation tool’ the Transmission Protection Instrument. Given the highly uncertain geopolitical environment, the ECB also announced a ‘transition to a meeting-by-meeting approach to interest rate decisions’, effectively halting forward guidance. The ECB noted that activity is slowing in the Eurozone, due to both the invasion of Ukraine and high inflation impacting demand.
The Jul flash PMIs showed a continued broad-based slowdown in growth momentum, including slower order growth and declines in export orders. Services output growth slowed across all markets. Manufacturing output contracted across most markets, except Australia, and contracted more notably in the Euro area (led by Germany). In Germany, finished goods inventory increased at a near record rate highlighting the scale of the slowdown in demand.
The contraction in the US services PMI output component was notable, falling by -5.7pts. New export orders also contracted. This is roughly in line with the weakening conditions in the housing market with continued declines in mortgage applications, substantial falls in existing home sales for Jun, and weaker housing market conditions in Jul. The US flash manufacturing PMI for Jul showed contracting demand and flat output growth as firms worked through backlogs in the absence of higher demand. The other important development has been the small, but consistent increase in initial jobless claims, now up to +251k as of last week.
Outlook for the week ahead
In the US, the FOMC is expected to increase rates by another 75bps this week bringing the FFR target to 2.5%. We’ll be looking for how signaling might shift as the FFR reaches 2.5% (around the “neutral rate”). Will the FOMC start to signal smaller hikes? Does the FOMC start to show a degree of sensitivity to slower growth and/or easing inflation?
US data this week should provide a further guide on the growth momentum. A key focus will be on the high-frequency initial jobless claims data (expecting around +250k). GDP in Q2 (prelim) is expected to grow by +0.4% on a SAAR-basis, up from -1.6% in Q1 (Q1 GDP showed more resilient private sector demand, but fell due to the change in inventories and net exports). The PCE price inflation data for Jun is expected to show little change from the +6.3% increase in May. Other data includes personal income and spending for Jun, durable goods orders for Jun, consumer sentiment for Jul, and more regional manufacturing surveys for Jul.
Euro area data this week will also provide a guide on growth and inflation momentum. The prelim Q2 GDP for the Euro area (and country-level data) will be released. Euro area growth is expected to slow from +0.6% in Q1 to +0.1% in Q2. The prelim Euro area CPI data for Jul will also be released (including country-level inflation data). The Euro area CPI is expected to accelerate slightly to +8.7% in Jul from +8.6% in Jun.
Finally, important Q2 CPI data for Australia will be released – a timely update for the RBA board meeting next week when a further hike in interest rates is expected. Annual CPI is expected to accelerate to +6.3% in Q2 up from +5.1% in Q1. The QoQ increase is expected to slow to +1.9% in Q2 from +2.1% in Q2.
This week, the US Treasury will auction and settle approx. $248bn in ST Bills and 10yr TIPS raising approx. $51bn in new money. The US Treasury will also auction the 2yr, 5yr, and 7yr Notes and the 2yr FRN this week and will settle early next week.
Approx. $24bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be rolled over. Approx. $16bn in Notes and Bonds (making up the remainder of the monthly $30bn cap) will mature and 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 | Jul 18, 2022
Key events for the week ahead – ECB & BoJ policy decisions, RBA Minutes, inflation reports, and prelim PMIs for July
Recap from last week
US CPI accelerated more than expected to +9.1% for Jun. Fed speeches and market reactions indicate that at least another 75bps hike is expected by the FOMC next week. There is a sense that the Jun CPI report marks a near-term peak in the pace of headline inflation given the easing in energy and commodity prices. But measures of core inflation (trimmed and median) and sticky CPI suggest that inflation pressure is still broadening and may take longer for it to peak. Even if headline inflation growth slows, it may take longer for core inflation to return to target levels.
US retail spending for Jun came in better than expected at +1% (still slightly negative in real terms), and consumer sentiment was little changed from Jun. The weakness in Jun US manufacturing from the regional and PMI reports was reflected in the -0.5% decline in manufacturing output in Jun. Both durable and non-durable goods output declined.
Continued high inflation had central banks announcing larger rate hikes last week. The BoC surprised with a 100bps increase in the target overnight rate to 2.5%, citing higher and more persistent inflation than expected. The BoC expects inflation to stay around 8% for the next few months. This week, the Jun CPI for Canada is expected to increase to +8.3% (from +7.7% in May).
The RBNZ also lifted the official cash rate by a further 75bps last week to 2.5%. The bank noted near-term upside inflation risks, supported by a tight labour market (3.2% unemployment rate). This week, NZ Q2 CPI came in higher than expected at +7.3% for Jun.
Outlook for the week ahead
There will be more central bank activity this week.
The BoJ will meet on monetary policy, but no policy change is expected. The BoJ is expected to update its inflation outlook. The Japanese National CPI for Jun will be released this week. Core inflation (ex-fresh food) is expected to stay elevated at +2.2% (from +2.1% in May).
The ECB is expected to increase its key rates by 25bps. The net asset purchases ended on 1 July. So far, inflation has continued to increase at an elevated pace. Sentiment is weakening and there are signs of slowing growth momentum, especially in periphery countries. Generally, markets are expecting a short hiking cycle.
The RBA minutes will be released this week. The RBA raised the cash rate target by another 50bps to 1.35% at the Jul meeting. Last week’s Jun labour market report reflected a further tightening in conditions – high employment growth, a new high in participation, and a near-term record low unemployment rate of 3.5%. This will give the RBA confidence to continue hiking rates. This week, Governor Lowe will speak, and Asst Governor Bullock will also speak about how Aus households are placed for interest rate increases. Next week, the Q2 CPI report will be released – in time for the Aug meeting the following week.
UK CPI for Jun is expected to increase further by +9.3% (versus +9.1% in May).
The prelim S&P PMIs for Jul will be released this week. There was a notable slowdown in Jun, especially in US manufacturing and across the Eurozone. The Jul reports are expected to show little change in momentum from Jun.
There will be no Fed-speak this week in the blackout period ahead of the FOMC meeting next week.
This week, the US Treasury will auction and settle approx. $211bn in ST Bills raising approx. $3bn in new money.
The US Treasury will also auction the 10yr TIPS and the 20yr Bond this week.
Approx. $19bn in ST Bills will mature on the Fed balance sheet this week and will be rolled over.
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 | Jul 11, 2022
Key events for the week ahead – US CPI & retail sales, RBNZ & BoC policy decisions, and US Q2 earnings
Recap from last week
The pace of inflation, the strength of the labour market, and growth remain key barometers for central banks in this tightening cycle. The FOMC minutes reflected the hawkish tilt at the June meeting following the May CPI report. A key change was the shift from ‘expeditiously to neutral’ to restrictive policy, and, possibly to an ‘even more restrictive stance’ if elevated inflation pressure persists. At this stage, it’s likely the FOMC will raise the FFR target by another 75bps at the Jul meeting. Since the last meeting and CPI report, the market narrative has shifted to growth and recession concerns if the Fed maintains this hawkish angle. The FOMC has done little to dampen this narrative.
US labour force data continued to confirm robust conditions for May and Jun. Non-farm payrolls for Jun were higher than expected at +372k, but with -72k revisions for the two prior months.
The US labour market started the year on a strong note, but the pace of momentum has eased since Mar. This is evident across slower (yet still high) payroll and household employment growth and a slightly rising trend in initial jobless claims since Mar. The peak (so far) in job openings was in Mar, the peak in hires was in Feb, and quits peaked back in Nov 2021. US layoffs and discharges reached a low in Dec 2021.
The US ISM reports highlight slower growth momentum since late 2021 also. Manufacturing conditions eased more notably by Jun – especially new orders (confirmed by the S&P PMI and regional surveys). The ISM services momentum also eased, but the headline expansion remains at the average 2019 pre-pandemic level. There is some sign of slowing services new orders/demand growth (especially in the US S&P Services PMI).
Global S&P PMIs for Jun was stronger – led by broader expansion from the reopening of China. Ex China highlights slower growth momentum in manufacturing – led by the Eurozone (including Germany) and the US. Eurozone services also slowed notably. The PMIs summarise the different headwinds facing many nations; including the roll-off of significant covid-era stimulus, high inflation impacting consumption, a war on the doorstep of Europe, an energy crisis, and rising rates.
Outlook for the week ahead
There are several important US reports out this week in the lead-up to the Jul FOMC meeting. The first is US CPI. Inflation is expected to accelerate to +8.8% for the year (expectations for up to +9%), up from +8.6% in May. Monthly CPI is also expected to remain high at +1.1% in Jun (versus +1% in May). Core CPI is expected to increase at a constant +0.6% for the month and +5.8% for the year, down from +6% in May.
The second is US retail sales growth, which is expected to rebound to +0.8% in Jun after a fall in nominal sales in May of -0.3%.
RBNZ monetary policy decision – markets are expecting a 50bps increase.
BoC monetary policy decision – and the expectation is for a 75bps increase. Headline CPI in Canada remains elevated. The employment decline in Jun was offset by a fall in participation, so the unemployment rate fell to 4.9%. Wage growth was stronger than expected.
Aus labour market report for Jun will be another important barometer for the RBA. Employment growth is expected to slow but the unemployment rate is also expected to fall to a record 3.8%.
The highly anticipated US Q2 earnings reports will commence later this week.
The US Treasury will auction and settle approx. $317bn in ST Bills, Notes, and Bonds raising approx. $10bn in new money this week.
Approx. $36bn in ST Bills, Notes, Bonds, and TIPS (incl compensation) will mature on the Fed balance sheet this week and will be rolled over. Approx. $13.6bn in Notes, Bonds, and TIPS (incl compensation) will 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 | Jul 4, 2022
Key events for the week ahead – US non-farm payrolls, FOMC & ECB minutes, RBA policy decision
Recap from last week
At the ECB Forum at Sintra last week, central bankers agreed that we aren’t returning to a ‘lowflation’ world. While Inflation may come down from these peaks, it could stay elevated compared to before the pandemic – and this has implications for monetary policy settings. Central bankers also felt there was urgency in tightening to ensure inflation does not become entrenched. Whilst Chair Powell thought there was a risk of “going too far” with tightening and risking a recession, in fact, “the bigger mistake to make, let’s put it that way, would be to fail to restore price stability.” (US Fed Chair Powell).
But will these central banks maintain this hawkishness if growth does slow in a meaningful way? In Europe, the Euro area flash CPI for Jun continued to accelerate to a record +8.6% but the flash PMIs for Jun suggests a slowdown in manufacturing and services momentum plus weak sentiment. The ECB has yet to even start raising rates (although conditions are tightening). There is still a considerable downside risk to growth in the Euro area from a further escalation with Russia/Ukraine and energy policy.
The BoE is not seen as behind the curve. The UK economy is “at a turning point” and showing signs of slowing while the inflation rate remains at an extreme +9.1%. The BoE Governor noted at Sintra that it would act more forcefully if inflation remained persistent, but hinted that raising the policy rate was not the only option.
Finally, the FOMC has been tightening more aggressively. The PCE inflation rate increased at a constant pace of 6.3% in May (+6.3% in Apr), but the Atlanta Fed trimmed mean still shows inflation broadening across categories. There are signs of easing pressure from energy and other commodity prices, which may be reflected in upcoming inflation reports. But US manufacturing, services, and housing data are fuelling growth concerns. US regional manufacturing surveys for Jun recorded a notable slowdown in orders over the last two months. Firms are instead working through backlogs and tight inventories are starting to ease. The ISM manufacturing report for Jun also reported a slight contraction in orders as well as a further, moderate contraction in employment.
Outlook for the week ahead
During his FOMC press conference in Jun, Chair Powell said that the “objective is to bring inflation down to 2% while the labour market remains strong”. The labour markets will remain a key barometer for the central banks and for the pace of tightening in the near term.
This week, the focus will be on US non-farm payrolls for Jun. Initial claims over the last few weeks have remained steady, albeit slightly elevated. Non-farm payrolls are expected to increase by +270k in Jun (+390k in May). Participation is expected to be little changed at 62.3% and the unemployment rate is expected to remain at an extremely low 3.6%.
The FOMC and ECB minutes from the prior meetings will be released this week.
The RBA will meet on policy this week. Governor Lowe noted that the discussion will likely focus on a 25 or 50bps increase in the cash rate target. Markets are expecting another 50bps increase. The labour market remains strong, while there is some evidence of the housing market starting to slow.
The final global PMIs for Jun will continue to be released this week. Also, Germany’s factory orders and industrial production data for May will be an important gauge of activity in the Euro area.
This week, the US Treasury will auction and settle approx. $182bn in ST Bills, with an estimated paydown of $26bn.
Approx. $20bn in ST Bills will mature on the Fed balance sheet this week and will be rolled over.
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
