by Kim | Oct 7, 2024
Key events this week – US CPI & PPI, Minutes; FOMC, ECB, & RBA, RBNZ policy meeting
Recap from last week; The US labor market not weakening as much as thought.
During his speech last week, US Fed Chair Powell’s comments built on the themes from the most recent FOMC meeting. He was more explicit though about his reaction function for data and rates through the end of 2024, indicating that if the U.S. economy follows the trajectory outlined in the most recent SEP, then two 25bps cuts can likely be expected in the remainder of the year. He emphasized that the Fed has embarked on “policy recalibration”, meaning that moving policy rates down slowly to neutral will help achieve the task of bringing down inflation. However, he reiterated that it is still a data-dependent approach;
“This is not a committee that feels like it’s in a hurry to cut rates quickly,” Powell said. “Ultimately we will be guided by the incoming data. And if the economy slows more than we expect, then we can cut faster. If it slows less than we expect, we can cut slower.” (Source: Bloomberg, 1 Oct 2024)
Powell’s upbeat tone from the last FOMC press conference was reinforced by the recent upward revisions to US GDP and GDI data. This had reduced perceived downside risks as spending, income, and savings were stronger than previously thought. He also expressed confidence in inflation moving toward the 2% target, based on August PCE data, while acknowledging the tension between cooling in the labor market and solid GDP growth.
However, the payroll and employment data for Sep suggested that the US labor market may not be weakening as much as recent data has suggested. The Sep payroll report was strong with the headline increase of +254k far exceeding expectations while the two prior months were revised higher by +72k. There was positive news on the unemployment rate which fell from 4.22% in Aug to 4.05% in Sep, as the household survey recorded a strong rebound in employment growth, while growth in the labor force slowed. Despite the stronger employment and payroll growth this month, average weekly hours and total aggregate hours declined over the month, though may recover next month. Average hourly earnings growth eased a little over the month but increased to +4% over the year.
Other new labor market data released last week mostly reflected Powell’s ‘solid’ labor market conditions. The number of job openings increased back up to over 8m but remained below the 12mth average. Falling hires reflected slowing demand for labor but no evidence that firms were increasing layoffs. The quits fell more notably in Aug. Elevated Challenger job cut announcements in Sep continued to contrast with the trend in low initial jobless claims.
After Powell’s speech, and the stronger payroll data, US rate cut expectations for the remainder of the year were scaled back (source: CME Fedwatch).
The US PMIs for Sep revealed two key sectors moving at a different pace: renewed weakening in manufacturing conditions, while the services sector outlook remained more optimistic. The stronger expansion in services is so far offsetting the weakness in manufacturing and this was broadly reflected in the composition of the payroll data for Sep too. However, the latest Atlanta Fed GDP Nowcast for the Q3 growth run-rate slowed to +2.5% – but was based on limited data last week. The update this week will reflect the monthly trade and wholesale inventory data. Next week should provide a broader update on the US growth run rate for Q3.
The S&P global PMI’s indicated that global growth momentum may have eased in Sep. The global manufacturing PMI weakened further into modest contraction for the third month in a row, while global services activity moderated. At a global level, the expansion in services continues to offset the weaker manufacturing conditions, but this differs by country/region.
Of note was the further weakening in the Eurozone PMIs for Sep – especially across some of the larger Eurozone members. With concerns over the growth outlook, together with the lower-than-expected flash Euro area CPI for Sep, ECB officials hinted at an increased possibility of another rate cut at the Oct meeting.
An interest-rate cut that European Central Bank officials deemed unlikely just three weeks ago now seems a near certainty when they next set borrowing costs on Oct. 17. Markedly souring business surveys, the first below-2% inflation reading in more than three years and the reassurance offered by the Federal Reserve’s own shift to easing, have all brought policymakers toward the point where a quarter-point reduction appears to need little more than a formal sign-off. (Source: Bloomberg, 2 Oct 2024)
Newly appointed Japanese Prime Minister Ishiba stated that the country is “on the verge of overcoming deflation,” while his newly appointed ministers urged caution from the BoJ regarding further rate hikes at this time. In a speech during the week, BoJ Governor Ueda was broadly seen as supporting the sentiment of the incoming PM, continuing to reflect the more recent dovish tone and noting uncertainty in the outlook for the global economy. The Japanese National election will be held on 27 Oct, several days before the next BoJ meeting.
Outlook for the week ahead; In a quiet week of data, US inflation and central banks will be in focus.
The US CPI and PPI report for Sep will be important in continuing to build confidence that inflation is moving back to the 2% target for the FOMC.
Growth in the US headline CPI is expected to slow to +2.3% in Sep from +2.5% in Aug. The monthly rate is expected to slow to +0.1% over the month, from +0.2% in Aug. Core inflation will be the more important indicator, and is expected to slow to +3.1% over the year in Sep, from +3.2% in Aug. The monthly pace of core CPI is expected to slow to +0.2% in Sep from +0.3% in Aug.
Growth in the US headline PPI is expected to slow to +1.6% over the year in Sep, from +1.8% in Aug. The monthly pace of growth is expected to slow to +0.1% Sep, from +0.2% in Aug. Growth in core PPI is expected to increase slightly to +2.65% in Sep from +2.4% Aug. The monthly pace of core PPI is expected to slow to +0.2% in Sep from +0.3% in Aug.
The latest FOMC minutes will be released this week. This should provide insight into the decision to commence rate cuts in this cycle and what it means for the broader suite of policy settings such as QT.
There will be a large number of US Fed speeches this week. Not all speeches will be on the economic outlook, but it will be important to see how Fed officials have incorporated the stronger labor market data into their outlook.
The ECB and RBA minutes will be released this week. The ECB did cut policy rates at the last meeting, noting that, given recent inflation dynamics, it was appropriate to take another step in moderating the degree of policy restriction. The RBA had kept rates on hold at the last meeting.
The RBNZ will meet this week and is expected to cut its policy rate by 50bps.
Chinese data will be in focus. New loan data for Sep may start to highlight the flow of new policy stimulus. Also, Chinese CPI & PPI data for Sep will be released this week.
This week, the US Treasury will auction and settle approx. $482bn in ST Bills, raising approx. $31bn in new money. The US Treasury will also auction the 3-year and 10-year Notes, and the 30-year Bond – to settle on 15 Oct.
QT this week: Approx $9bn of ST Bills will mature on the Fed balance sheet and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Kim | Sep 30, 2024
Key events this week – US non-farm payrolls, US Fed Chair Powell speech, Eurozone CPI prelim, S&P global PMIs – final
Recap from last week – Signs of progress on US PCE Inflation
Last week, Fed speeches confirmed broad support for the FOMC’s decision to start cutting rates. Speeches indicated that further cuts may be warranted if inflation progresses, or labor market conditions continue to soften. Fed officials noted that future rate cuts would be guided by incoming data, with no predetermined pace for easing. Leading up to the next FOMC meeting in Nov, progress on inflation and labor market conditions will remain a key focus. Faster progress on inflation and/or weaker labor market conditions are likely to edge the FOMC towards a larger rate cut. Markets are currently pricing a 48% probability of a 50bps rate cut in Nov (source: CME FedWatch).
Last week’s release of the Fed-preferred PCE inflation report for Aug showed signs of continued progress – confirming the trend of the Aug CPI. Core PCE remained firmer, remaining at +2.7% in Aug. While core PCE has stalled here for the last few months, it is still on track to slow to the expected +2.6% rate by year-end. Core services inflation, led by a renewed increase in shelter prices, continued to offset the deflationary trend in core goods. At the last FOMC press conference, Fed Chair Powell noted that rent prices were not slowing as fast as expected and that owners’ equivalent rent (OER) was “coming in high”. Powell’s comments suggested that the FOMC is looking through rent inflation in these reports as long as market rent measures trend lower.
The US growth run-rate for Q3 firmed last week, however the message was mixed. Based on the spending, income, GDP, and durable goods data last week, the latest Atlanta Fed GDP Nowcast ticked up to a +3.1% run rate for Q3 so far. The lift in the growth rate was led by an increased contribution from net exports and the change in private inventories. This more than offset the downward effect of the slower pace of personal spending growth in Aug.
The RBA kept its policy rate unchanged at 4.35%, which is still lower than most other central banks. While temporary factors have lowered inflation, the Board noted that inflation remains persistent, and policy must stay “sufficiently restrictive” until inflation sustainably moves toward the target. The Aus CPI for Aug fell due to energy rebates, a decline that the RBA had anticipated. The RBA kept its outlook unchanged, that it did not expect inflation to fall sustainably to target until 2026.
The prelim round of S&P PMIs for Sep showed a downshift in growth in the final month of Q3. The expansion in services remained moderate but did slow – likely reflecting the end of the Olympics. The positive expansion in services helped to cushion a renewed contraction in manufacturing activity, especially in Europe, but also in Aus, and the US. The broader suite of global PMIs will be released this week and will be important to gauge shifts in broader global growth momentum.
The announcement of new stimulus measures in China resulted in a marked improvement in sentiment around the growth outlook. A range of measures were announced last week that aimed to “boost growth, halt the property rout, shore up the stock market, and stabilize employment” (source: Bloomberg).
Outlook for the week ahead – US Fed Chair Powell speech; the economic outlook & US labor market conditions
US Fed Chair Powell will give a speech on the economic outlook early this week (Mon afternoon). He is expected to reiterate points from the recent FOMC meeting and will likely provide his characterization of last week’s PCE price inflation release. There will be several other Fed speeches throughout the week.
At the end of the week, the first of two critical US labor market reports will be released, helping to set the stage for the Nov FOMC meeting. Signs of further cooling in the labor market could see markets price in an increased likelihood for a larger sized rate cut.
US non-farm payrolls are expected to increase by +144k in Sep, after increasing by +142k in Aug. The direction of the prior month’s revisions will be important to the overall view of labor demand. The unemployment rate is expected to be unchanged at 4.2% with the participation rate also expected to be unchanged at 62.7%. Average weekly hours are expected to be unchanged at 34.3.
The JOLTS survey for the end of Aug is expected to show a further slowing in the number of job openings to 7.64m, from 7.67m in Jul.
Average weekly hours are expected to slow to +3.3% over the year, from +3.8% in Aug.
The Challenger job cut announcement report for Sep will also be released. There had been an uptick in job cut announcements to 75k in Aug, especially in the Tech sector. Job hiring announcements were also tepid.
The US ISM manufacturing and services PMI surveys for Sep will be released – and are expected to show manufacturing activity contracting, while services momentum remains modest. Last week, the US S&P prelim PMIs for Sep showed another sharper contraction in manufacturing activity, offset by the continued moderate pace of expansion in services activity.
The Eurozone prelim CPI for Sep will be important for shaping the outlook for the ECB, especially in the context of renewed weakness in activity highlighted by the Sep PMIs. Headline Eurozone CPI is expected to slow to +1.9% over the year in Sep, from +2.2% in Aug. Core inflation is expected to slow to +2.7% over the year in Sep from +2.8% in Aug.
The broader suite of S&P global PMIs will be released this week.
This week, the US Treasury will auction and settle approx. $719bn in ST Bills, Notes, Bonds, and TIPS, raising approx. $132bn in new money.
QT this week: Approx $17.6bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx. $20bn of Notes & Bonds will be redeemed 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 | Sep 23, 2024
Key events this week – US PCE inflation, Fed speeches, RBA & SNB meeting, Aus CPI, S&P Prelim PMIs Sept
Recap from last week
Last week, the FOMC joined the shift towards easing monetary policy settings. The FOMC began its rate-cutting cycle with a 50bps decrease in the FFR. The key message of the decision was that this was a “recalibration” of policy settings “to something more appropriate given the progress on inflation, and on employment, moving to a more sustainable level”. Fed Chair Powell struck a mostly positive tone in the press conference, describing the economy as ‘in good shape’, ‘growing at a solid pace’, that ‘inflation is coming down’, and that the labor market is in a ‘strong place’. He did address the recent cooling of the labor market, but noted that this rate cut represents an “intention to maintain the strength that we currently see in the US economy”. Future decisions would “go carefully meeting-by-meeting”, and “there’s no sense that the Committee feels it’s in a rush to do this”. The latest SEP indicated a median of approx.100bps of cuts projected for this year, up from 50bps in Jun. Governor Bowman dissented on the FOMC’s decision to cut the FFR by 50bps – preferring a 25bps cut. Governor Bowman noted in a separate statement, “I see the risk that the Committee’s larger policy action could be interpreted as a premature declaration of victory on our price stability mandate”.
US data released last week showed growth has remained solid so far through Q3. The Atlanta Fed GDP Nowcast growth run-rate for Q3 lifted to +2.9% by the end of the week. The largest contributor to the increase though was the change in private inventories, while retail sales, industrial production, and new housing starts all made smaller, but still positive contributions to the acceleration in run-rate for Q3.
Many other central banks have already taken the opportunity to begin to realign policy rates as inflation has eased – and there are still a few exceptions.
After cutting rates for the first time in this cycle in Aug, the BoE kept rates unchanged at this meeting. The Committee noted that “a gradual approach to removing policy restraint remains appropriate”. Inflation remains a concern, with decisions on the Bank Rate guided by the need to “squeeze persistent inflationary pressures out of the system”. The latest UK CPI remained firmer, supporting that cautious and gradual approach by the BoE. Core inflation increased to +3.6% in Aug from +3.3% in Jul, led by a continued firming in services inflation. Headline inflation has remained at around +2.2% for the last few months. The BoE expects CPI inflation to “increase somewhat” over the remainder of this year.
The BoC has cut rates several times now, and as Canadian inflation has eased more notably in recent months, suggests that the BoC may have room for further easing. Canadian CPI in Aug slowed to +2% over the year in Aug. Excluding gasoline, inflation slowed to +2.2% in Aug. The BoC measures of core inflation continued to ease and averaged +2.2% over the year in Aug, down from +2.4% in Jul.
The RBNZ has only recently begun to cut rates, amid concerning signs of weaker growth. The Q2 GDP print last week confirmed that the economy did contract by -0.2% in Q2. With signs that “a variety of core inflation measures are (now) moving consistent with low and stable inflation”, further policy easing by the RBNZ is possible.
The BoJ has remained an outlier – as it has been dismantling some of its monetary accommodation frameworks. After increasing rates last month, the BoJ left its policy settings unchanged in Sept. The decision was based on maintaining accommodative financial conditions to support the infancy and evolution of the ‘virtuous cycle’ from rising prices, wages, and incomes to spending. The latest National Japanese CPI showed inflation continued to firm with a broad-based contribution in Aug. The BoJ preferred measure of inflation, core CPI ex fresh food increased to +2.8% in Aug, up from +2.7% in Jul. The trend of this monthly core rate has stepped up through 2024 and, while not as elevated as in 2023, it appears to be more persistent with the monthly rate at or above +0.3% each month since Mar.
Outlook for the week ahead
Inflation, central banks, and Fed speeches will remain in focus this week.
The US PCE inflation for Aug will be released at the end of the week, providing an update on the Fed’s preferred measure of inflation. Headline PCE is expected to increase by +2.3% in Aug, down from +2.5% in Jul. The monthly rate is expected to be unchanged at +0.2% in Aug. The core PCE rate is expected to increase by +0.2% over the month, which would see the annual PCE inflation rate, lift slightly to +2.7% in Aug.
There will be several other US data releases that will contribute to an update on the Q3 growth run rate. Personal spending is expected to slow to +0.3% over the month in Aug, from +0.5% in Jul. Personal income is expected to increase by +0.4% in Aug, up from +0.3% in Jul. Advance durable goods orders are expected to fall somewhat by -2.8% after the stronger +9% rebound in the prior month.
US initial claims have continued to ease and came in lower at +219k last week after averaging over +230k for the prior twelve weeks. Claims are expected to rise to +226k this week.
There will be a variety of Fed speeches this week. US Fed Chair Powell is scheduled to give pre-recorded opening remarks on Thurs. Fed Governor Bowman will give several speeches this week and may provide more detail on her dissenting rate cut opinion.
The RBA will meet this week and is expected to keep policy settings unchanged. The RBA has yet to cut rates, diverging from other central banks by maintaining its cash rate at a lower 4.35%. At the last meeting, the Board noted that higher rates have helped to bring supply and demand into better balance, but that inflation is remaining persistent and still “some way” above the midpoint of the 2-3% range. The latest labour market report was again positive, with employment growth remaining robust and the unemployment rate edging lower. The latest monthly CPI report for Aug will be released this week but after the RBA meeting. Headline inflation is expected to slow to +3.1% in Aug.
The SNB will meet this week and is expected to lower its policy rate by 25bps.
Finally, the latest S&P prelim PMIS for Sept will be released this week. This will provide a further update on growth momentum going into the final month of Q3.
This week, the US Treasury will auction and settle approx. $454bn in ST Bills and FRNs, with a net paydown of $1bn. The US Treasury will also auction the 2-year, 5-year, and 7-year Notes this week and all will settle at the end of the month on 30 Sep.
QT this week: Approx $2.6bn of ST Bills will mature on the Fed balance sheet and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Kim | Sep 16, 2024
Key events this week – FOMC, BoJ, and BoE meetings, US retail sales, CPI: Japan, UK, and Canada
Recap from last week
The US CPI report for Aug was a little mixed given the unexpected firmness in core CPI. Recent comments by Fed Chair Powell have noted that ‘the job is not yet done on inflation’, but there has been a ‘good deal of progress’ towards bringing inflation down. Importantly for this week’s FOMC meeting, the Aug CPI and PPI reports are consistent with that sentiment.
US headline inflation eased notably in Aug. Falling energy prices, slowing food inflation, and some base effects resulted in the annual headline inflation rate falling to +2.5% in Aug. However, a rebound in shelter price growth helped keep the annual core CPI rate unchanged at +3.2%. Other indicators of underlying inflation showed more moderation in Aug. The trimmed mean inflation rate continued to ease and suggests that inflation pressure within the center of the distribution (or, the underlying trend) is moderating. The Fed’s “super core” inflation measure (core services excluding shelter) had been in focus due to its resurgence at the start of the year. While super core inflation slowed to +4.5% in Aug, down from +5% at the start of the year, it remains elevated. The monthly rate held steady at +0.2%, significantly lower than the Q1 average of +0.6%, which suggests it continued to abate.
The ECB cut its deposit facility rate last week by 25bps. ECB President Lagarde noted that ‘given the gradual disinflationary process, it was perfectly appropriate to moderate the degree of monetary restriction”. Guidance was left unchanged with the ECB noting that “it will keep policy rates sufficiently restrictive for as long as necessary” to return inflation to the 2% medium-term target in a timely manner, following a data-dependent approach. Euro area headline inflation was broadly in line with expectations; however, services inflation had been higher than expected. The ECB inflation outlook indicates firmer readings expected through the back half of 2024, but headline inflation is expected to fall to the ECB target “over the second half of next year”. Euro area growth fell short of expectations in Q2, and the growth outlook was revised slightly lower with the ECB noting weaker private domestic demand. Risks to growth remain tilted to the downside.
Outlook for the week ahead
It’s a big week of central bank meetings, global inflation reports, and a robust update on the pace of US growth midway through Q3.
The key event this week is the FOMC meeting, where the Federal Reserve is expected to begin its rate-cutting cycle. In addition to delivering the first rate cut, the meeting will provide insights into how the Fed’s outlook has evolved since Jul. At the Jul meeting, the FOMC signaled a return to a more balanced view of its dual mandate. But with disappointing labor market data, and increasing uncertainty on the growth outlook during the intermeeting period, Fed Chair Powell’s speech at Jackson Hole signaled a shift to protecting against the perceived increase in downside risks to the labor market;
The upside risks to inflation have diminished. And the downside risks to employment have increased.
We will do everything we can to support a strong labor market as we make further progress toward price stability.
The updated SEP, statement, and press conference will be important for outlining the changes to the FOMC outlook and the path of rates amid the moderating labor market. The FOMC is expected to cut rates by at least 25bps this week, but markets are increasingly pricing in the possibility of a larger 50bps cut (source: CME FedWatch).
US data this week will provide a more robust update on the Q3 growth run rate – with consumer spending, industrial output, and housing investment data for Aug. So far in Q3, the Atlanta Fed GDP Nowcast is tracking growth at +2.5% (annualized). US retail sales in Aug are expected to fall by -0.2% in Aug from a more robust +1% in Jul. Industrial production for Aug is expected to stabilize at +0.1% after falling by -0.6% in Jul. New housing permits are expected to remain little changed at 1.41m (annualized) while housing starts are expected to increase to 1.31m (annualized). Initial jobless claims have remained steady around the +230k/week level over recent weeks and are expected to be +232k this week.
The BoE will meet this week and is expected to keep policy rates unchanged, after cutting rates at the last meeting. The decision to cut last month was by a slim 5-4 majority. Before the meeting, UK CPI for Aug will be released. UK headline inflation has slowed through early 2024 and has remained steady recently around the +2% – +2.3% level since Apr. Headline CPI is expected to be unchanged at +2.2% in Aug. Core CPI is expected to increase back to +3.5% in Aug from +3.3% in Jul. Services inflation is easing but remains elevated at +5.2%.
The BoJ will meet this week and is expected to keep policy rates unchanged. However, there could be signaling on the near-term path of rate hikes. Last week, BoJ Board member Nakagawa hinted that policy normalization was still on the agenda and reiterated that “monetary easing will be adjusted if the outlook for Japan’s economy and inflation is realized” and that “the current level of real rates is extremely low” (source: Bloomberg). The latest Japanese CPI for Aug will be released around the same time as the BoJ decision is expected. Headline inflation is expected to be unchanged at +2.8% over the year in Aug. The BoJ core measure of inflation (ex-fresh food) is expected to increase slightly to +2.8% over the year from +2.7% in Jul.
Data out of China for Aug continued to disappoint last week and the PBoC indicated it was “preparing to launch some additional measures, further lower the financing costs for businesses and households, and keep liquidity reasonably ample” (source: Bloomberg). The PBoC is expected to meet this week.
Inflation in Canada is expected to moderate further in Aug. Headline CPI is expected to ease from +2.5% in Jul, with the monthly pace expected to slow to +0.1% in Aug from +0.4% in Jul. The BoC measures of core CPI have slowed more notably recently and averaged +2.4% in Jul, and this is expected to slow further to an average of +2.3% in Aug. The minutes of the latest BoC meeting will also be released this week.
Finally, the Aug labour market survey for Aus will be released this week. Growth in employment in Aug is expected to slow to +26k from the stronger +59k in Jul. Participation is expected to be little changed at 67.1% and the unemployment rate is also expected to be unchanged at 4.2%.
This week, the US Treasury will auction and settle approx. $545bn in ST Bills, Notes, and Bonds, raising approx. $32bn in new cash. The US Treasury will also auction the 10-year TIPS and 20-year Bond this week; both will settle at the end of the month.
QT this week: Approx $2.4bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $5.1bn of Notes and Bonds will be redeemed 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 | Sep 9, 2024
Key events this week – US CPI & PPI, ECB policy meeting
Recap from last week
The US labor market hiring continued to slow in Aug while the unemployment rate edged only slightly lower. Last week, US Fed Governor Waller noted that the risks to the labor market have shifted to the downside and aligned with Fed Chair Powell in indicating that it’s time for policy adjustments. His outlook was balanced;
While I don’t see the recent data pointing to a recession, I do see some downside risk to employment that I will be watching closely. But at this point, I believe there is substantial evidence that the economy retains the strength and momentum to keep growing, supported by an appropriate loosening of monetary policy. Source: Speech Fed Governor Waller, 6 Sep 2024
US nonfarm payrolls rose by +142k in Aug, coming in lower than expected, with further notable downward revisions for Jun and Jul. The 3-month average for NFP growth slowed to +116k in Aug, continuing to decelerate since Mar. Job openings dropped sharply at the end of Jul to 7.67m (expecting 8m), with Jun also revised lower. The job openings rate fell to 4.6%. Fed Governor Waller has previously quoted research indicating that a vacancy rate below the 4.5% threshold could result in a “significant increase in the unemployment rate” (source: Governor Waller, speech Jan 16, 2024).
The Fed’s Beige Book reported steady employment across regions, though some companies reduced hours or relied on attrition to manage employment levels. The Beige Book noted that reports of layoffs “remain rare”. The JOLTS layoff rate inched up to 1.1% in Jul but remains relatively low. A notable rise in the Challenger Job Cut Announcements in Aug signaled the potential for an increase in layoffs ahead. High-frequency initial claims, however, have eased, indicating layoffs are not yet a significant concern.
Despite weaker hiring, the US unemployment rate edged down from 4.25% to 4.22% in Aug but still sits above the FOMC’s projection of 4% by the end of 2024. The small fall in the unemployment rate was the result of a rebound in household employment growth while labor force growth slowed. Household employment growth is still especially low on an annual and monthly basis – and this month, employment growth was led by part-time employment, as full-time employment declined.
Uncertainty over the US growth outlook has increased recently, adding to concerns over the labor market. The Beige Book highlighted a weakening or stalling in growth conditions in the 3 months to Sep, but the slowdown seems to be marginal. The US ISM PMIs for Aug indicated offsetting effects of contracting manufacturing activity with a continued modest expansion in services. A more robust reading of the US Q3 growth run-rate is expected next week – but the latest Atlanta Fed GDP Nowcast has Q3 growth remaining around +2.1%.
There is little uncertainty now whether the FOMC will cut rates next week. But despite the lackluster labor report for Aug, markets pared back expectations over the size of the first rate cut, and are currently pricing in a 25bp cut next week (source: CME FedWatch).
Outlook for the week ahead
The focus this week will be on US inflation data.
Ahead of the FOMC meeting next week, the importance of the CPI report for Aug is to reinforce that inflation is on a sustainable path to 2%. Recent Fed speeches suggest that there is already growing confidence that inflation is on that path and that upside risks to inflation have diminished.
US headline CPI is expected to slow to +2.6% in Aug over the year, from +2.9% in Jul. The monthly pace of CPI growth is expected to stay at +0.2%. Core CPI is expected to be little changed at +3.2% over the year in Aug, versus +3.2% in Jul. Over the month, core CPI is expected to increase by +0.2% in Aug, versus +0.2% in Jul.
US headline PPI is expected to slow to +1.8% over the year in Aug, from +2.3% in Jul. Over the month, headline PPI is expected to increase slightly to +0.2% in Aug from +0.1% in Jul. Core PPI is expected to increase to +2.5% in Aug, from +2.4% in Jul. Over the month, core PPI is expected to increase to +0.2% in Aug from 0% in Jul.
Initial claims data is expected to stay little changed, rising slightly to +231k this week, from +227k last week. The trajectory of the initial and continuing claims has remained lower in recent weeks.
The US Presidential debate will be held early this week.
We are also in the blackout period for Fed speeches ahead of the FOMC meeting next week – however, Fed Vice Chair (Supervision) Barr will give a speech this week on the Basel III endgame.
The ECB will meet this week and is expected to cut its policy rate by a further 25bps. The ECB has maintained its data-dependent and meeting-by-meeting approach to determining the level and duration of its policy restriction. Inflation in Aug continued to ease with headline inflation slowing to +2.2% however, core inflation eased only slightly to +2.8%. Growth in Q2 across the Eurozone was lower than previously expected at +0.2%. Recent PMIs have highlighted the ongoing contraction in the manufacturing sector, especially in Germany, while services have expanded moderately, buoyed by the Olympics in France.
There will also be a wide range of China data out this week.
This week, the US Treasury will auction and settle approx. $426bn in ST Bills, with a net paydown of $59bn. The US Treasury will also auction the 3-year and 10-year Notes and 30-year Bonds – and will settle next week.
QT this week: Approx $2.5bn in ST Bills will mature on the Fed balance sheet and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Kim | Sep 2, 2024
Key events this week – US non-farm payrolls & labor market update, ISM surveys, US Fed Governor Waller speech, BoC policy meeting
Outlook for the week ahead
This week, the focus will be on the Aug US labor market update and its implications for the path of US interest rate policy.
The message from Fed Chair Powell at Jackson Hole was clear – “the time has come for policy to adjust” as upside inflation risks have diminished and downside risks to the labor market have increased. He expressed increased confidence that inflation is on a sustainable path back to 2% and last week’s PCE inflation data reinforced that view. On the labor market, the Fed Chair reaffirmed some of his comments from the last FOMC meeting. At the last FOMC press conference, the Fed Chair noted that “I would not like to see a material further cooling in the labor market”. Following the weaker-than-expected Jul labor market data, the Fed Chair was clear in his Jackson Hole remarks; “We do not seek or welcome further cooling in labor market conditions”. After Jackson Hole, markets expect rate cuts to begin at the Sep FOMC meeting. The labor market update for Aug could provide important input for determining the initial pace of that easing. So far, markets are pricing a 25bp cut, but still a chance for a 50bp cut (source: CME FedWatch).
This week’s data will offer a broader view of the US labor market, potentially clarifying if the notably weaker Jul report was an outlier. US non-farm payroll growth in Aug is expected to rebound to +164k from +114k in Jul. The unemployment rate is expected to fall back to 4.2% from 4.3% in Jul. Last month, temporary layoffs contributed to the increase in unemployment, along with faster growth in labor supply – both measures will be in focus this week. The average hours worked is expected to rebound to 34.3 in Aug from 34.2 in Jul. Job openings at the end of Jul are expected to continue to ease further to 8m, from 8.184m at the end of Jun. The layoff rate has remained near the series low while quits have also eased. Average hourly earnings are expected to rebound over the month to +0.3% and increase by +3.7% over the year. The weekly initial claims data has stabilized around +230k claims/week. Claims are expected to be +235k this week.
There will be several other releases providing insight into the broader US growth context. The ISM manufacturing PMI is expected to show manufacturing conditions remained weaker at 47.8 in Aug. The ISM services PMI is expected to show a slower pace of expansion at 50.9 in Aug from 51.4 in Jul. US factory orders are expected to rebound by +4.5% in Jul from -3.9% in Jun.
The broader US growth context has remained positive. Last week, the Q2 GDP was revised higher in the second estimate from +2.8% to +3% annualized due in part to higher personal spending. With data still limited for the current quarter, the latest Atlanta Fed GDP Nowcast has the growth run-rate easing slightly to +2.5% so far in Q3.
Fed Governor Waller is scheduled to speak on Friday after the US payrolls and labor market data, providing an update on the Economic Outlook. NY Fed President Williams is also expected to speak on Friday. These will be important speeches before the blackout period next week, ahead of the next FOMC meeting on 17-18 Sep.
The Bank of Canada meets this week and is expected to cut rates by a further 25bps. The BoC has already cut rates at its last two meetings. The Canadian labour market update for Aug will be released at the end of the week. Employment growth is expected to rebound to +25k from -2.8k in Jul. However, the unemployment rate is expected to edge higher to 6.5% in Aug from 6.4% in Jul.
Australian GDP growth for Q2 is expected to lift slightly to +0.2% from +0.1% in Q1. At the last RBA meeting, Governor Bullock noted that growth forecasts had been upgraded due to public demand and a lift in household spending as real wages increased. Data revisions indicated that spending may not have been as weak as previously thought. The RBA Governor will give the annual speech to the Anika Foundation this week – and this usually provides an important update on economic conditions.
Finally, the broader suite of S&P Global PMIs will be released this week for Aug.
This week, the US Treasury will auction and settle approx. $681bn in ST Bills, Notes, and Bonds raising approx. $100bn in new money.
QT this week: Approx $3bn in ST Bills will mature on the Fed balance sheet and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
