by Kim | Jan 6, 2025
Key events this week – US jobs report Dec, FOMC minutes, Fed speeches, CPI: Euro area, China, and Australia
Recap from last week: Manufacturing activity remains weak in December.
Despite another quiet week for economic data, the Atlanta Fed GDPNowcast for Q4 US GDP growth recorded a marked slowdown. Following the release of the advanced economic indicators on 27 Dec, the GDP nowcast was revised down to +2.6% from +3.1%. It slowed further again to +2.4% after the release of the Dec ISM manufacturing PMI. While this is a notable slowdown, the stronger US services sector PMIs and US jobs data this week should help to balance the view of Q4 growth.
Two key surveys released last week showed continued weakness in the US manufacturing sector in Dec. The ISM manufacturing PMI for Dec showed conditions remaining relatively flat, though improving to a modestly neutral level from the prior month. The S&P manufacturing PMI for Dec also showed the manufacturing sector continuing to contract slightly in Dec. After improving in Nov, sentiment in the outlook for manufacturing output growth eased back again. This week, the US services PMIs will be closely watched to gauge the overall health of the US economy. The expansion in services activity over the second half of 2024 has been offsetting the stalled US manufacturing sector.
There was broadly weaker momentum in manufacturing activity in Dec with the S&P global manufacturing PMI shifting back into slight contraction. Output, orders, employment, and purchase of inputs all declined, but supplier lead times lengthened. Intermediate and investment goods industries remained weaker while activity in consumer goods continued to expand. On a country basis, the strongest expansion in output was recorded in India followed by the Philippines, Spain, Greece, Taiwan, and Canada. The strongest declines in output were again observed in France and Germany – two of the leading manufacturing nations.
Outlook for the week ahead; Focus on the US jobs report and the FOMC.
It will be another short week with the National Day of Mourning for President Carter on 9 Jan 25.
The US jobs report, FOMC minutes, and Fed speeches will likely provide valuable insights and could potentially shape the near-term economic outlook. The release of the FOMC minutes is not yet scheduled on the Fed calendar at the time of writing but should be scheduled for the 8 Jan.
The FOMC minutes and the Fed speeches will be the first substantial input from the Fed since the unexpected hawkish shift at the Dec FOMC meeting. Both could provide valuable information for understanding the Fed’s change in stance. This week, Fed Governor Waller will provide an update on the Economic Outlook. Governor Waller is generally instructive in providing a framework for thinking about the near-term data and implications for policy. In his recent speech on 2 Dec, Governor Waller balanced his remarks on inflation. He noted that while recent data had raised the possibility of stalling inflation progress, he cautioned against overreacting, given that a similar firming of inflation in 2023 had subsided. Also, Governors Cook and Bowman will speak on the economic outlook this week.
The FOMC Dec minutes should provide important insight into the decision to cut rates and signal a shift in its stance that rates are now “significantly closer to neutral” and that it will move cautiously on rate cuts if the economy evolves as expected. Guidance was changed at that meeting to reflect the extent of further cuts would be limited, consistent with being closer to neutral, and that it was now appropriate to slow the pace of adjustments. Fed Chair Powell noted that while the disinflation story remained intact and they are confident on the path to 2% inflation, progress on achieving the 2% inflation target may take longer than expected. This was reflected in the PCE inflation projections out to 2026. The overall decision noted elevated uncertainty in the outlook with the Fed expecting significant policy changes from the incoming Trump administration.
The important point for the Fed’s rate path in the near term is that “as long as the economy and the labor market are solid, we can be cautious about, as we consider further cuts” (source: FOMC Press Conference 18 Dec 24). Fed Chair Powell also noted that “we want to keep the labor market pretty close to where it is now”. The US jobs data this week will therefore be a crucial input for the Fed as it considers its next move on rates. In Nov, payroll job growth had rebounded after the strike and weather disruptions, while the unemployment rate increased back in line with YTD highs. Unexpected labor market weakness could see the Fed quickly shift its outlook, while a stronger, or ‘in line’, jobs report will likely keep the Fed’s path unchanged.
Key factors to watch this week:
- US non-farm payroll growth is expected to slow to +154k, after increasing by +227k in Nov. The direction of revisions to Nov will be important for the underlying trend of payroll growth. Some central banks are increasingly referencing the split between market and non-market (govt) job growth to measure private sector strength.
- From the household survey; the US unemployment rate is expected to be unchanged at 4.25% while the participation rate is also expected to be unchanged at 62.5%. Average hourly earnings are expected to be unchanged at +4% over the year in Dec. The monthly rate is expected to slow to +0.3% in Dec from +0.4% in Nov.
- The JOLTS survey for Nov (lags by a month) is expected to show job openings at 7.77m in Nov, little changed from the Oct level of 7.74m.
Outside of the US, the focus shifts mostly to inflation data.
- Euro area prelim CPI for Dec is expected to be slightly firmer over the year at +2.4% in Dec, up from +2.2% in Nov. Core CPI is expected to be unchanged at +2.7%. The ECB recently noted that its expectations are for inflation to fluctuate in the near term around current levels due to energy price base effects.
- The Aus CPI monthly series for Nov is expected to show headline inflation increasing to +2.3% over the year, up from +2.1% in Oct. This monthly data series is relatively new, with the quarterly report providing a more detailed inflation reading for the RBA.
- China CPI is expected to be little changed at +0.1% over the year in Dec, down from +0.2% in Nov. Chinese trade data will also be released toward the end of the week. Last month, the Chinese trade surplus increased after stronger growth in exports and another decline in imports.
- The S&P Global services PMIs for Dec will be released early in the week, providing the broader picture of private sector activity in the final month of 2024.
This week, the US Treasury will auction and/or settle approx. $470bn in ST Bills, raising approx. $4bn in new money. The US Treasury will also auction $119bn across the 3-year and 10-year Notes and the 30-year Bond this week – all to settle on 15 Jan.
QT this week: Approx $9.1bn 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 | Dec 30, 2024
Key events this week – US ISM manufacturing PMI, global PMI’s Dec
Recap from last week: The Atlanta Fed Q4 GDP growth run rate is unchanged.
US economic growth continues to maintain stronger momentum through the second half of 2024.
The final estimate of US Q3 GDP growth was recently revised higher to a +3.1% annualized pace – driven by an acceleration in exports, consumer spending, and federal government spending in the quarter (source: BEA). Based on limited data last week, the Atlanta Fed GDP nowcast for Q4 US GDP growth remained steady at a +3.1% run rate, indicating continued robust economic activity. However, data highlight that pockets of weakness remain, particularly in US residential investment as mortgage rates have again risen. Data last week showed that US new home sales in Nov detracted slightly from growth in Q4, but this was offset by contributions from the durable goods report. Looking ahead to 2025, the US growth backdrop remains positive, amid a hawkish shift by the Fed and the uncertainty surrounding the extent of new Trump administration policies.
In contrast, the minutes from some central banks have highlighted concerns regarding their respective growth outlook.
The latest RBA minutes detailed the shift in the Board’s outlook at the Dec meeting. The Board noted that data had broadly evolved as expected and not enough to shift its forecasts. However, risks that inflation may resolve more slowly had diminished, while downside risks to activity had strengthened. Two points led to this shift in risks; recent weaker activity (Q3 GDP), and wage growth that had slowed by more than expected, suggesting greater capacity in the labour market than had been assumed. Guidance shifted to reflect the Board gaining some confidence that inflation is moving sustainably to the target – “but risks remain”. At the time of the decision, this led markets to begin pricing in the possibility of an earlier rate cut, potentially as soon as Feb, when the next set of forecasts will be released. As of 27 Dec, markets are pricing in a rate cut by Apr.
The BoC deliberations outlined the debate between a 25 or 50bps rate cut at its last meeting. The Governing Council reduced rates by 50bps citing downside risks to its inflation forecast and a weaker growth outlook. Policy settings no longer needed to be “clearly restrictive”. Not all recent data had pointed to a need for a 50bps cut, but the cumulative effect of rate cuts since June would be needed to reduce the slack in the economy and maintain inflation around the 2% target. In light of ‘substantial’ cuts since June, guidance was shifted to expectations for “a more gradual approach” to monetary policy going forward.
Outlook for the week ahead; Another short week, focus on Dec PMIs.
It will be another short week with a quiet data calendar. US data will be limited to the ISM manufacturing PMI, pending home sales, and vehicle sales for Dec.
The full suite of global PMIs for Dec will begin to be released this week and will provide a broad update on momentum in private-sector manufacturing and services activity in the final month of the year.
Key factors to watch this week:
- US ISM manufacturing PMI for Dec – the headline index is expected to be little changed at 48.3 (from 48.4 in Nov). This will feed into a limited update to the Atlanta Fed GDP nowcast for Q4.
- US pending home sales are expected to increase by +0.9% in Nov after +2% in Oct. The slowing in activity partly reflects the renewed increase in mortgage rates since the end of Sept.
- S&P global manufacturing PMI reports for Dec will begin to roll out this week, with the services reports to follow next week.
This week, the US Treasury will auction and/or settle approx. $658bn in ST Bills, Notes, Bonds, and TIPs, raising approx. $35bn in new money.
QT this week: Approx $12bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $18bn in Notes and Bonds will mature on the Fed balance sheet and will be redeemed/roll-off the balance sheet.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
From our team to yours, we extend warmest wishes for the holidays. May the New Year bring you health and happiness!
by Kim | Dec 23, 2024
Key events this week – US durable goods orders, RBA & BoJ minutes
Recap from last week: Fed signals shift to a cautious approach to further rate cuts.
The FOMC decision last week signaled a more hawkish shift in the Fed’s stance. Even the decision to cut rates by 25bps last week was described as a “closer call” by Fed Chair Powell. There was one dissenting vote – Beth Hammack preferred to keep policy settings unchanged.
The Fed’s Dec decision reflected a shift away from ‘recalibrating policy’, to being “at or near a point at which it will be appropriate to slow the pace of further adjustments”. After 100bps of cuts over the last three meetings, the Fed signaled that it is now “significantly closer” to the neutral policy rate, and it will be moving cautiously on further rate cuts. The SEP reflected fewer rate cuts for 2025 – with 50bps of cuts penciled in at this stage.
“Nonetheless, we see ourselves as still on track to continue to cut.” Fed Chair Powell, Press Conference 18 Dec 2024
This shift partly stems from a change in the Fed’s view on the upside risk to inflation. While the Fed maintains its belief in the disinflationary trend, it acknowledges that more work needs to be done to bring inflation down. PCE inflation is likely to end the year higher than expected, and FOMC members now project higher headline inflation at the end of 2025, with a longer path back to the 2% target according to the latest SEP. The stalling progress on inflation was acknowledged at this meeting;
So you’ve got, you had two months of higher inflation, September and October, as I mentioned November is back on track but once again we’ve — we’ve had a year-end projection for inflation and it’s kind of fallen apart as we’ve approached the end of the year.
“…inflation has once again underperformed relative to expectations.” US Fed Chair Powell, Press Conference 18 Dec 2024
However, the slower rate cut path also considered that the growth outlook is likely to remain stronger and unemployment stable, while near-term, policy uncertainty remains elevated. New guidance reflected this firmer growth backdrop and slower progress on inflation, emphasizing the need to carefully consider the “extent and timing” of further rate cuts. Fed Chair Powell noted that the FOMC will be looking for further progress on inflation and continued strength in the labor market before considering additional rate cuts.
The Nov PCE inflation report showed some improvement on a monthly basis, with headline inflation moderating to +0.1%. However, the annual inflation rate increased from +2.3% in Oct to +2.4% in Nov, highlighting the Fed’s ongoing concerns. While headline inflation was +2.7% a year ago, most of the 0.26 percentage point decline since then occurred in the first half of the year. Moreover, the projection for headline PCE inflation in 2025 has been revised upward to +2.5%, exceeding the +2.1% projected in Sept.
Core PCE inflation has remained firm, posing a challenge for the Fed. While acknowledging this, Fed Chair Powell highlighted progress in certain areas. In Nov, core PCE inflation remained unchanged at +2.8% year-over-year, with the monthly rate easing to +0.1%. A year ago, core PCE was at +3.2%, with most of the 0.4 percentage point decline occurring in the first five months. This context informs the Fed’s 2025 projection. Core PCE is projected to reach +2.5% by the end of 2025, representing a decrease of only 0.3 percentage points from the November 2024 level. This slower pace of deceleration compared to earlier in the year underscores the challenge for the Fed. Despite this, Fed Chair Powell emphasized that a decline to +2.5% core PCE inflation by the end of 2025 would still represent “significant progress.”
So we and most other forecasters still feel that we’re on track to – to get down to 2 percent it might take another year or two from here, but I’m confident that that’s the path we’re on. US Fed Chair Powell, Press Conference 18 Dec 2024
Both measures of PCE inflation were projected to be at 2% at the end of 2026, as recently as the September projections. The projection of 2% inflation has now been pushed out to the end of 2027.
There was a varied emphasis regarding the other central bank decisions last week.
The BoE kept rates unchanged as expected, however, that decision was based on a 6-3 majority. There seems to be a narrowing path for the BoE; inflation is firm and domestic price pressures are “resolving more slowly” than expected, while near-term activity has been weakening. This is against a backdrop of elevated levels of policy uncertainty based on the Autumn budget measures, geopolitical uncertainties, and trade policy uncertainty.
The BoJ also kept policy rates unchanged and tended to emphasize maintaining more accommodative settings for now. Accommodative financial conditions are aiding the recovery, while inflation is forecast to reach the price stability target in H2 2025. Risks and uncertainty over trade policy remain elevated. Governor Ueda’s press conference seemed to be setting up for a later rate hike;
Ueda said more information on Japan’s wages and the policies of US President-elect Donald Trump is needed before the BOJ can decide on a rate hike. Source: Bloomberg
Outlook for the week ahead; Holiday week, US durable goods orders, and RBA/BoJ minutes.
It will be a short week with a quiet data calendar. US data highlights will be limited to the advance durable goods orders and new home sales – both of which will add to a further update to the Atlanta Fed GDP nowcast for Q4 growth. Several central banks will release minutes this week.
Key factors to watch this week:
- US Durable goods orders for Nov are expected to fall by -0.4% in Nov after increasing by +0.3% in Oct.
- New home sales are expected to increase at an annualized rate of +0.66m in Nov, up from 0.61m in Oct.
This data will top up the robust update on the US Q4 GDP run rate from last week. The Atlanta Fed GDP nowcast has the US Q4 growth run rate currently at +3.1%.
- The Tokyo CPI for Dec will provide an advance read on Japanese inflation for Dec. Tokyo core CPI ex fresh food is expected to increase to +2.5% in Dec, up from +2.2% in Nov.
There will be several central bank minutes released this week;
- The BoC will release the summary of deliberations for its 11 Dec meeting.
- The RBA will release the minutes of its latest meeting in Dec. This should provide some further background behind the shift from a restrictive outlook to a more dovish tone.
- The BoJ will release the minutes of the Oct meeting.
This week, the US Treasury will auction and settle approx. $513bn in ST Bills and FRNs, with a net paydown of -$42bn. The 2-year, 5-year, and 7-year Notes will be auctioned this week and will settle on 31 Dec.
QT this week: Approx $4.6bn 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
From our team to yours, we extend warmest wishes for the holidays. May the New Year bring you health and happiness!
by Kim | Dec 16, 2024
Key events this week – US Fed rate decision, BoJ & BoE meetings, key data releases; US PCE inflation & retail sales, global CPI reports, and S&P prelim PMIs
Recap from last week: Implication of US inflation on Fed rate cut expectations.
Last week’s firmer US CPI & PPI reports did not change the expectations for a Fed Dec rate cut this week. Markets had mostly priced in a rate cut before the data and this probability edged up after the US CPI & PPI data was released (source; CME Fedwatch).
Firmer headline CPI was driven by larger contributions from food and energy inflation. Progress on core CPI has stalled at around +3.3% for the last four months. However, there were some positive developments within core CPI. Notably, inflation had eased in previously persistent categories such as shelter, core services, and “super core” inflation. The Fed has been anticipating further progress in these areas. Conversely, the deflationary impact of core goods inflation has weakened in recent months. With inflation showing some improvement in specific areas like shelter and core services, the FOMC is likely to maintain confidence in its path toward the 2% target. Nevertheless, the Fed is likely to acknowledge that inflation remains elevated and that achieving the target may take longer than anticipated.
The PPI came in slightly higher than expected. However, markets have focused on the implications of CPI and PPI for the Fed’s preferred PCE inflation measure. Some expectations are for core PCE to round down to a +0.1% rate in Nov and be unchanged at +2.8% over the year. The Cleveland Fed PCE Nowcast suggests a higher expected PCE and core PCE rate for Nov. The broader expectation is for +0.2% core PCE over the month. The FOMC will make its decision this week ahead of the release of the PCE inflation data.
It was the first of two weeks of key central bank decisions to conclude the year. So far, we continue to see a shift towards a less restrictive stance of policy with neutral rate settings as the target, cautious optimism on inflation progress, and some country-specific weakening in the growth outlook.
The first cab off the rank turned out to be China, with the Politburo announcing that it would “embrace a “moderately loose” policy strategy next year” (source: Bloomberg 9 Dec 2024), the first adjustment of its monetary policy stance in over a decade. Further detail is still expected on fiscal programs to support consumer spending and growth in the broader economy.
The RBA kept policy settings on hold. There was a notable shift in its view on inflation and guidance. The Board is now “gaining some confidence that inflationary pressures are declining” but that “risks remain”. The Board is seeing some of the softer data recently, including slower growth, as positive for the inflation outlook. The RBA shifted its guidance; removing reference to needing to be “sufficiently restrictive” on policy, and is no longer “not ruling anything in or out” regarding the next move on rates. Governor Bullock was specific about watching data over the next month. The Aus labour market data for Nov was firmer with the unemployment rate falling back to 3.9%. While employment growth rebounded from a flat month in Oct, the fall in total unemployed persons was also the result of another fall in the participation rate. The firmer labour market conditions remain in contrast to the slower growth environment but are at least supporting the RBA to stay on hold while inflation comes down.
The BoC cut rates by 50bps as expected. The Board noted that, after a “substantial” reduction in rates since Jun, those cuts need some time to flow through to the economy. The policy rate is likely approaching neutral, so the BoC is signaling that it would be moving to a more gradual approach to monetary policy, “evaluating the need for further cuts, one decision at a time”.
The ECB reduced its Deposit Facility Rate by 25bps as expected. The decision was based on its updated assessment of the inflation outlook – that, overall, the disinflation process is continuing. There was a shift in its guidance also; removing reference that “it will keep policy rates sufficiently restrictive for as long as necessary” and removing mention of “restriction” or “duration of restriction”. There was a downbeat view of growth, with the pace of economic recovery slower than expected. From the press conference, the ECB did discuss a 50bps cut at this meeting but deemed the 25bps cut more appropriate, given they still want to see further progress on inflation.
The SNB cut rates by 50bps. The Governing Board noted inflation pressure had decreased again in this quarter, more than expected. The SNB has forecast inflation to average only +0.3% over 2025 – with a high degree of uncertainty over this forecast, and “the development of the Swiss franc is still an important factor”. Without the 50bps rate cut at this meeting, the “conditional inflation forecast would have been lower”. Growth was “only modest” in Q3 and there was a further slight rise in unemployment.
Outlook for the week ahead; Fed’s rate decision amidst key economic releases.
It will be another pivotal week of central bank meetings and key economic data. The Fed is expected to cut rates again and provide a broad context for its policy outlook in 2025. A range of US economic data, including the Nov PCE inflation report, global CPI reports, and S&P prelim PMIs will also be released.
Key factors to watch this week:
- US Fed rate decision; the Fed is expected to cut rates by 25bps at this meeting. The decision details will be a key focus, especially for how the Fed is reading current labor market conditions and inflation firmness. We continue to expect a cautious approach, dependent on labor market conditions remaining positive. This should set the stage for any change in guidance on cuts through 2025. The focus will then shift to the key projections for the broader outlook period (the SEP). This should specifically address changes in the projected path of inflation, growth, unemployment, and the outlook for policy rates.
- Other central banks; The BoJ are expected to keep policy rates unchanged this month, despite recent speeches indicating that “rate hikes are nearing”. Guidance in speeches has been guarded, only noting that there was still a large amount of new data to consider in the lead-up to this meeting, suggesting it could be a live meeting. Similarly, the BoE is expected to keep policy settings unchanged.
- US core PCE Inflation for Nov is expected to increase by +0.2% over the month down from +0.3% in Oct. This would result in core PCE inflation increasing to +2.9% over the year from +2.8% in Oct.
A broad range of US data for Nov that will feed into a robust update on the US Q4 GDP run rate. Currently, the Atlanta Fed GDP nowcast has US Q4 growth running at +3.3%.
- US retail sales are expected to increase by +0.5% over the month in Nov, up slightly from +0.4% in Oct. The Oct retail control was mostly flat at -0.1% – and this is expected to rebound in Nov.
- The PCE personal spending report for Nov is also expected to show a further lift in consumer spending of +0.5% in Nov, up from +0.4% in Oct. Personal income growth is expected to increase by +0.4% after increasing by +0.5% in Oct.
- US housing starts are expected to rebound in Nov to 1.35m annualized, from 1.31m in Oct. Industrial production is expected to increase by +0.2% in Nov after a -0.3% fall in Oct. The first Dec regional manufacturing surveys will be released this week.
Global inflation reports will be in focus this week.
- In Canada, CPI inflation is expected to be +0.1% in Nov, down from +0.4% in Oct. The annual pace should ease from +2%. The BoC core measures of inflation averaged +2.4% in Oct and are expected to ease to +2.3% (avg) in Nov.
- UK headline CPI is expected to increase to +2.6% in Nov from +2.3% in Oct. Core CPI is expected to edge higher to +3.6% in Nov, from +3.3% in Oct. The Oct UK CPI report reflected somewhat broader inflation pressure. The BoE will be looking for some improvement on that this month and will be meeting after the release of this data.
- Japan’s National CPI had been a little firmer in Oct, specifically over the month. The BoJ preferred core CPI ex fresh food is expected to increase to +2.6% over the year in Nov, from +2.3% in Oct. This data will be released after the BoJ meeting announcement.
- The final Euro area CPI for Nov is expected to confirm headline CPI fell by -0.3% over the month and increased by +2.3% over the year. Core CPI is expected to be confirmed at +2.7% over the year in Nov.
Finally, the S&P prelim PMIs for Dec (key G4 developed markets + Aus) will be released early in the week. This will provide some insight into growth momentum in the final month of the year. There is some expectation for a recovery in manufacturing activity in the short term. The Nov PMIs for this group had shown manufacturing continuing to contract, while services growth slowed. The notable exception had been the continued stronger expansion of the US services sector.
This week, the US Treasury will auction and settle approx. $437bn in ST Bills, with a net paydown of -$34bn. The 20-year Bond and 5-year TIPS will be auctioned this week, to settle on 31 Dec.
QT this week: Approx $1.3bn 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 | Dec 9, 2024
Key events this week – US CPI & PPI, Central bank decisions; RBA, BoC, ECB, & the SNB
Recap from last week: Mixed signals from the US labor market.
Fed Governor Waller’s speech last week addressed the central question facing the FOMC ahead of its meeting next week: Cut or Skip? Generally resilient conditions have had many questioning how many cuts are needed given US inflation has remained firmer, growth more resilient, and concerns over labor market weakness have abated. US Fed Chair Powell noted in his discussion last week;
“Growth is definitely stronger than we thought, and inflation is coming a little higher,” Mr. Powell said at The New York Times’s DealBook Summit on Wednesday. “The good news is that we can afford to be a little more cautious as we try to find neutral.”
In their speeches, neither Fed Chair Powell nor Governor Waller took a skip off the table for the Dec meeting. However, Governor Waller articulated a much higher bar for data to justify a skip at the next meeting and, is still leaning toward a cut. Fed Chair Powell didn’t provide a direction as to which way he is leaning on a Dec rate decision. Previously, he had indicated a cut in each of the last two meetings of the year if data evolved as they expected – this is still likely to be the case.
The Nov labor market data, a key factor in the Fed’s upcoming decision, presented a mixed picture. While there was a rebound in payroll growth in Nov, conditions in the household survey did not improve. The rebound in payrolls, hours, and nominal earnings indicated resilience. Payrolls and hours worked both recovered from October’s decline, while nominal and real wage growth remained firm. This adds to a positive outlook for household income.
Conversely, the household survey showed no similar rebound, indicating weakness had remained in Nov. The proportion of employed persons continued to decline, and, despite an offsetting fall in participation, the unemployment rate still increased back up to 4.25% – equal to the YTD high. Similarly, the unemployment rate for the core working age group increased to a new YTD high of 3.7% in Nov. While this wasn’t a sharp deterioration in conditions that might worry the Fed, it does suggest that the recent theme on “cooling conditions” remains intact. Hiring has slowed, but layoffs remain near lows. The pool of unemployed persons is rising, and it’s taking longer to find employment amid slower hiring conditions. Finally, research from the San Francisco Fed shows that overall labor market conditions have shifted from tight to one where labor supply now exceeds demand.
Overall, data last week was positive for US growth. As of 5 Dec (not including the jobs report from Fri), the Atlanta Fed GDP Nowcast for Q4 growth edged higher again to +3.3%. The next update will be early this week. After the US jobs report, markets priced in a higher probability of another rate cut by the Fed next week, but no notable increase in the outlook for cuts through 2025 at this stage.
Outlook for the week ahead; US CPI, PPI, and part one of central bank decisions.
The focus will be on two important areas this week. The first is US CPI & PPI reports for Nov and the second is the final round of central bank decisions for the year.
US CPI and PPI reports for Nov are expected to remain firm. Together, the CPI and PPI will provide a good estimate for the Fed-preferred PCE inflation rate for Nov. This will be another crucial input for the Fed decision next week, and for its 2025 outlook. Recent speeches indicate that some Fed members have been ‘less pleased’ about the firmness of inflation, noting that progress on core inflation appears to have stalled. However, the general sentiment has been that conditions indicate “inflation would likely continue to move down towards the Fed’s target.” (source: Bloomberg 3 Dec 2024).
Key factors to watch this week:
- US headline CPI for Nov is expected to increase by +2.7% in Nov, up from +2.6% in Oct. The monthly pace is expected to increase by +0.2% in Nov, versus +0.2% in Oct. US core CPI is expected to increase by +3.3% over the year in Nov, unchanged from +3.3% in Oct. Core CPI is expected to increase by +0.3% over the month in Nov, also unchanged from +0.3% in Oct.
- US PPI is expected to stay firm. Headline PPI is expected to increase by +2.5% in Nov, up from +2.4% in Oct. The monthly pace is expected to increase to +0.3% in Nov from +0.2% in Oct. Core PPI is expected to increase by +3.3% over the year in Nov from +3.1% in Oct. The monthly pace of core PPI growth is expected to be +0.3% in Nov.
It’s the first of two weeks of key central bank decisions to conclude the year. Within the decisions, we’ll look for any change in guidance. Updated forecasts for 2025 will help to shape the broader outlook for economic activity, rates, and any shift in the stance of central bank policy (restrictive, neutral, or shifting to accommodative?).
This week begins with the RBA, which is expected to keep settings unchanged. The RBA Governor has previously indicated that more than one quarterly CPI report would be needed to confirm a sustained decline in inflation. So, unless the labor market weakens significantly, the earliest potential rate cut could be in Apr or May next year. The RBA will consider the slower-than-expected growth for Q3, especially within the household sector. However, allowing for the treatment of government subsidies paid to households indicates that household spending may have strengthened in Q3. The latest RBA forecasts were released at the start of Nov, so no updates at this meeting. The important Aus labor market report for Nov will be released later in the week – conditions are expected to remain stable, with the unemployment rate edging higher to 4.2%.
The BoC is now expected to cut rates by 50bps this week, following the larger-than-expected rise in the unemployment rate to 6.8% in Nov. Lower inflation and falling interest rates may be fostering early signs of economic recovery. Given the notable increase in the unemployment rate, the BoC may seek to further support economic activity with a larger cut.
The ECB is expected to cut rates by 25bps, and new forecasts will be released. Progress on disinflation continues. Despite the weakening growth outlook, Q3 GDP growth was positive, indicating a rebound in household spending. However, recent weak activity reports and elevated political uncertainty in core Eurozone countries are likely to weigh on the ECB outlook.
Finally, the Swiss National Bank is expected to cut rates by at least 25bps.
The important Chinese Central Economic Work Conference will take place this week. Ahead of this meeting, and at the time of writing, the Politburo shifted its stance on monetary policy for the first time in over a decade, to “embrace a “moderately loose” policy strategy next year” (source: Bloomberg 9 Dec 2024) as officials prepare to address flagging economic conditions and uncertainty over tariffs next year. Chinese CPI, PPI, and trade data for Nov will also be released this week.
This week, the US Treasury will auction and settle approx. $571bn in ST Bills, Notes, and Bonds raising approx. $46bn in new money.
QT this week: Approx $3.2bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $7.1bn in Notes and Bonds 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 | Dec 2, 2024
Key events this week – US non-farm payrolls, Fed Chair Powell & Gov Waller speeches
Recap from last week: Slower progress on US inflation.
The US Fed’s preferred PCE inflation measure for Oct remained firmer, as both headline and core PCE inflation increased slightly. The core PCE inflation rate increased to +2.8% in Oct, exceeding the Fed’s year-end projection. The trend suggests that progress on underlying inflation appears to have stalled since May, reinforcing the challenge for the Fed to achieve its price stability target. Recently, the deflationary offset from core goods has become less pronounced, while core services inflation has continued to firm. Markets have continued to take this slower progress on inflation, amid the broadly resilient economic conditions, into account, with expectations for fewer rate cuts into 2025 (source: CME FedWatch).
An emerging sentiment around slower progress on inflation was reflected in the minutes of the FOMC meeting on 6-7 Nov, which occurred before this suite of firmer inflation data for Oct was released. The minutes highlight that;
“…participants remained confident that inflation was moving sustainably toward 2 percent, although a couple noted the possibility that the process could take longer than previously expected.” Source: FOMC Minutes 6-7 Nov
Despite the “somewhat” elevated core inflation, the discussion outlined the key dynamics expected to guide the path of inflation back down to target. Overall, the committee remained confident that inflation was returning sustainably to 2%. The minutes noted that while labor market conditions had eased from earlier in the year, the unemployment rate remained low. Recent labor market conditions had been affected by “temporary fluctuations from hurricanes”. Economic activity continued to expand at a solid pace. Current conditions supported the decision to further recalibrate the policy stance, “gradually moving towards a more neutral policy stance over time” with a 25bps cut in Nov. In responding to changes in the balance of risks, the minutes showed that the Committee could either hold the policy rate at a restrictive level if inflation remained elevated, or easing could be accelerated if the labor market or growth conditions deteriorated.
One of the themes of inter-meeting Fed speeches has been proceeding cautiously and gradually with rate cuts. Important speeches this week could provide opportunities for the Fed to signal any change in its intentions ahead of the next FOMC meeting, especially in light of the firmer Oct inflation data. This week, Fed Chair Powell’s discussion and Governor Waller’s speech on the economic outlook are particularly important, ahead of the blackout period next week and the Fed meeting the following week on Dec 17-18. For the moment, markets have shifted back towards pricing in a rate cut at the Dec meeting, while pricing in fewer cuts into 2025.
The latest Atlanta Fed GDP Nowcast for Q4 GDP remained little changed during the week. US personal spending and income, housing, and manufacturing data last week was broadly in line with maintaining the run-rate for Q4 GDP at +2.7%.
In Japan, the Tokyo CPI for Nov came in higher than expected. In an interview late last week, BoJ Gov Ueda signaled the possibility its Dec meeting could be ‘live’ for a rate hike decision, but without committing to a path of action;
Ueda last week said it’s “impossible” to predict the result of the next gathering as a large amount of new data was yet to be released in a signal that it will be a live meeting. Source: Bloomberg
In its final meeting for the year, the RBNZ cut rates by 50bps. The monetary policy committee noted that consumer price inflation had eased and was now close to the midpoint of the target range. Economic activity remained subdued while output remained below potential. The Committee expects to further reduce the OCR early next year if conditions continue to evolve as projected.
Outlook for the week ahead; US labor market update and speeches ahead of the Fed’s Dec meeting.
The focus this week will be on the broad update of US labor market conditions in Nov and will provide important input for the FOMC meeting on December 17-18. The Fed has been closely monitoring labor market conditions, especially viewing the notable weakness in non-farm payroll growth in Oct as a temporary event. The return to a more robust job market could reinforce expectations for fewer rate cuts amid the somewhat slower progress on inflation, while a weaker-than-expected report could signal rising expectations of accelerated rate cuts.
Key factors to watch this week;
- US non-farm payrolls are expected to increase by +202k in Nov, up from +12k in Oct. Revisions to prior months will be important for determining any shift in the overall trend.
- The US unemployment rate is expected to edge up to 4.2% – and this is still below the current Fed projection for the year-end unemployment rate of 4.4%.
- Hours and wage growth; Average weekly hours are expected to be unchanged at 34.3 while average weekly earnings are expected to slow slightly to +0.3% over the month, from +0.4% in Oct.
- JOLTS; The Job Openings for Oct (lags by one month) are expected to firm slightly to 7.49m in Oct from 7.44m in Sep.
We continue to monitor weekly initial claims data. Initial claims have fallen back down to the modest levels of this year, likely reflecting subdued layoff activity. At the same time, there has been a persistent increase in continuing claims – this could indicate slower hiring conditions. Initial claims for last week (Thanksgiving week), are expected to increase by 215k.
There will be several important Fed speeches this week, ahead of the Fed communication blackout next week. This might be an important opportunity for any shift in signaling by the Fed before the Dec 17-18 meeting. Of note, Fed Chair Powell will take part in a moderated discussion and Governor Waller will speak on the economic outlook early in the week. These speeches are scheduled before the release of Nov non-farm payrolls.
The US ISM surveys for Nov will help to confirm the recent direction of the US S&P PMIs – more widespread growth in services helping to offset lackluster manufacturing activity. The Fed Beige Book will be released this week, providing further insight into regional activity since early Oct.
Aus Q3 GDP is expected to accelerate to +0.5% over the quarter, from +0.2% in Q2. The components of that growth will be important, but generally, the firmer growth will support the RBA in keeping rates unchanged until further progress on inflation.
Finally, the broader global suite of PMIs for Nov will be released. Except for the US, the S&P flash PMIs for Nov offered a sobering view of output growth among larger G4 nations midway in Q4. The manufacturing sectors of the G4 countries remained in contraction, and the previously resilient service sectors had begun to show signs of slowing momentum.
This week, the US Treasury will auction and settle approx. $477bn in ST Bills raising approx. $6bn in new money.
QT this week: Approx $2.4bn 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
