by Kim | Mar 7, 2022
Key themes for the week ahead – Geopolitical risk, ECB policy meeting, US CPI
Recap from last week
The significant humanitarian toll and the economic and political fallout from the invasion of Ukraine continued to roil markets. Against the backdrop of surging commodity and energy prices, US Fed Chair Powell, in his testimony to the US Congress, confirmed that a 25bps increase for Mar “would be appropriate”. The plan to reduce the Fed balance sheet will not be finalized next week. After the Mar FOMC meeting, the Fed will “proceed carefully”. Inflation is too high, but the path and impact of sanctions are highly uncertain. Chair Powell signaled a path of stability over creating further uncertainty. The FOMC is now in the blackout period before next week’s meeting.
The target rate probabilities no longer reflect a more hawkish response from the FOMC in Mar. At the time of writing, markets were even pricing an 8% probability of no change to the FFR at next week’s meeting (a huge turnaround in market sentiment).
US data last week was strong. Non-farm payrolls and the household employment survey for Feb were stronger than expected. The US ISM surveys for manufacturing and services reflected a more constant pace of expansion during Feb.
The week ahead
The context for this week remains the ongoing and heightened geopolitical risk. Sanctions and the threat of embargos are having a significant impact on the supply and price of important food/ag commodities, industrial metals, and of course energy. If not contained quickly, this could exacerbate inflation problems, diminish the growth outlook, and will have a significant human toll.
The ECB will meet this week on policy. The ECB was expected to present a more thorough assessment of the inflation backdrop and forecasts at this meeting. But this will be a crucial meeting to understand how the ECB is changing its outlook in the context of the conflict – and it will be too early for the ECB to fully incorporate likely implications. Europe is facing even greater uncertainty with a war on its doorstep, financial market instability, and a potentially significant energy price shock.
The other important data point this week is US CPI for Feb and inflation is expected to stay extremely elevated. Headline CPI is expected to increase by +7.9% in Feb (up from +7.5% in Jan). The monthly pace of growth is also expected to accelerate to +0.8% (up from +0.6% in Jan). Political pressure on the Fed to rein in inflation has been building for some time now. At the Senate hearing last week Chair Powell was asked whether “the Fed was prepared to do what it takes to get inflation under control and protect price stability?”. Chair Powell responded, “…I hope history will record that the answer to your question is yes”. But the FOMC is not likely to enact measures that might disrupt markets right now.
This week, the US Treasury will auction and settle approx. $226bn in ST Bills with a net paydown of $69bn.
Approx. $17bn in ST Bills will mature on the Fed balance sheet this week and will be rolled over.
The US Treasury will also auction the 3-year and 10-year Note and the 30-year Bond this week – and will settle next week.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Kim | Feb 28, 2022
Key themes for the week ahead – Geopolitical risk, central bank decisions, US Fed Chair Powell testimony, US Fed speeches, US President Biden State of the Union speech, US non-farm payrolls
Recap from last week
Fed speak last week continued to discount the likelihood of a 50bps increase in the FFR in Mar. US PCE inflation continued to accelerate reaching +6.1% in Jan – a forty-year high. For context, the FOMC SEP for Dec had PCE inflation reaching +5.3% by the end of 2021. This further acceleration will keep pressure on the FOMC to adjust policy. The initial global PMIs for Feb showed a stronger rebound across services. Manufacturing output and momentum was little changed from the pace of growth in Jan, as firms cited ongoing input and labour shortages. The outlier was Japan recording a contraction across services and manufacturing output. Price growth remained higher across all sectors with both input and output charges increasing at an elevated pace.
The week ahead
The broad context for this week is the ongoing and heightened geopolitical risk. We expect this to introduce a cautious tone into central bank speeches and decisions this week.
This week, US Fed Chair Powell will give two days of testimony and there will be various Fed speakers. Last week, speeches were already indicating less aggressive tightening for Mar (+25bps rather than 50bps). Signaling by the Fed Chair this week at hearings will need to navigate a balance for policy to address persistently high inflation and the risk that rising geopolitical tensions will impact growth. In the current context, the more extreme tightening scenarios seem less likely for Mar. The Fed will highlight the importance of ‘data dependency’ during this heightened period of risk.
The RBA and BoC will announce the latest monetary policy decisions this week. The RBA is expected to keep rates on hold. The Aus wage price index data last week was on par with expectations and RBA forecasts. This is likely not enough to support an earlier (Jun) lift-off in tightening – but the RBA Board will provide updated guidance this week. After the RBA meeting, Aus Q4 GDP will be released and is expected to increase by +2.5% for the quarter and +3% for the year.
The BoC is expected to lift rates by 25bps at this meeting.
US President Biden will give the State of The Union speech this week. Any change to the nature of sanctions on Russia will be an important theme (e.g., by including energy).
US non-farm payrolls will be released this week for Feb. Payrolls are expected to increase by +450k after increasing by +467k in Jan. The unemployment rate is expected to fall to 3.9% while the participation rate is also expected to fall slightly to 62%.
This week, the US Treasury will auction and settle approx. $409bn in ST Bills, Notes, Bonds, and TIPS, raising approx. $92bn in new money.
Approx. $51bn in ST Bills, Notes, and Bonds 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 | Feb 21, 2022
Key themes for the week ahead – US PCE Inflation data, Fed speak, and continued geopolitical headline risk
Recap from last week
We noted last week that ‘fed speak’ would be prominent in the lead-up to the next FOMC meeting. Over the next three weeks, the question remains: is the Fed preparing markets for more or less aggressive tightening?
The FOMC minutes noted that members “expected” that it would soon be appropriate to raise the target range. The probability of a Mar rate lift-off looks likely. Several members had favoured ending QE earlier than Mar to signal a stronger commitment to bringing down inflation – this did not happen. Inflation risks were seen as tilted to the upside. QT: “conditions would likely warrant” beginning to reduce the size of the balance sheet “sometime later this year”. Also noted was that “if inflation does not move down as expected, it would be appropriate for the committee to remove accommodation at a faster pace than they currently anticipate”.
Coming into last week, markets were pricing the possibility of a 50bps increase at the Mar meeting after the Jan CPI. Speeches through the week have dampened that idea for the moment – citing the risk of unduly tightening financial conditions. At the very least, markets are expecting a 25bps increase in the FFR target range at the Mar meeting. This is still a fluid situation and US inflation data this week will be another important input for the Mar meeting.
US data remained solid last week – especially the Jan retail sales result led by non-store and motor vehicle sales (although Dec was revised lower). US PPI also surprised to the upside (with little impact on markets).
The week ahead
Geopolitical headline risk remains heightened.
Fed speak will continue with FOMC members Governor Waller, Cleveland President Mester, and Governor Bowman speaking this week.
US PCE inflation data will be released this week – the FOMC preferred measure of inflation. Headline PCE inflation is expected to increase by +5.5% in Jan from +5.8% in Dec. Monthly PCE inflation is also expected to ease to +0.3% from +0.4% in Dec.
The global prelim PMIs for Feb will be released this week providing insight into the rebound in global growth.
The RBNZ will also meet this week and is expected to increase the official cash rate by 25bps to 1%.
The Aussie Wage Price Index for Q4 is expected to increase by +0.7% QoQ/+2.4% YoY. This would be above current RBA forecasts of +2.25% YoY. This will be an important data point for the RBA as it looks for evidence of a higher trend in wage and inflation growth over the next several quarterly wage and CPI releases as it considers the case for earlier rate hikes.
This week, the US Treasury will auction and settle approx. $297bn in ST Bills and 2-year FRN, raising approx. $28bn in new money. The US Treasury will also auction the 2-year, 5-year, and 7-year Notes this week which will settle on 28 Feb.
Approx. $21bn 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 | Feb 14, 2022
Key themes for the week ahead – FOMC minutes, Fed speak, US retail sales, global CPI’s, and geopolitical risk
Recap from last week
US CPI for Jan came in higher than expected at 7.5%. The report showed that price growth pressure has continued to broaden among consumer expenditure categories.
That CPI print was pivotal in spurring further tightening expectations. Rates shifted higher and the yield curve flattened to a new YTD low as rate hike expectations reflected more aggressive tightening required by the Fed (50bps hike for Mar and hikes expected at most meetings this year). There is a sense of urgency, especially politically, to fix the inflation problem. The prelim consumer sentiment for Feb was much weaker than expected and fell to the lowest level in over ten years, due mostly to the expected impact of inflation on personal finances. Whether this weaker sentiment impacts spending will be important.
The week ahead
The FOMC doesn’t meet again until 16 Mar – in four weeks’ time. There were calls last week for the Fed to take immediate action with an ‘emergency’ rate hike before the Mar meeting. In the absence of any inter-meeting action, Fed-speak will fill the vacuum over next four weeks. So far, Bullard supports at least three hikes before July including a 50bps hike, while Daly (not an FOMC member) pushed back on expectations for more, and aggressive hikes, citing the destabilizing effect it might have. Five (5) of eight (8) FOMC members will speak this week, likely expressing a full range of policy options. The Jan FOMC Minutes will be out this week and commentary is expected to support expectations for hikes starting in Mar.
The Feb RBA minutes will be released this week. The detail around Governor Lowes outlook was delivered separately in his speech the day after that RBA meeting. The minutes are likely to reiterate that the Board is willing to be patient on rate hikes. Markets are starting to price the first interest rate hike for Aug. The Aus labour market survey for Jan will be out this week and employment is expected to contract by -15k persons amid the peak of the latest outbreak. The unemployment rate is expected to remain unchanged at 4.2%.
US retail sales for Jan are expected to increase by +1.6% after falling -1.9% in Dec.
CPI reports for the UK (expecting +5.4%), Canada (+4.8%), Japan (+0.6%), and China (+1%) will be released this week.
Uncertainty is heightened over the Russia-Ukraine situation with significant headline risk.
This week, the US Treasury will auction and settle approx. $351bn in ST Bills, Notes, and Bonds raising approx. $81bn in new money. The US Treasury will also auction the 20yr Bond and 30-year TIPS this week which will settle on 28 Feb.
Approx. $86bn in ST Bills, Notes, and Bonds 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 | Feb 7, 2022
Key themes for the week ahead – US CPI, speeches
It will be a quiet week on the data front as markets digest data and central bank decisions from the last few weeks.
Recap from last week
Central banks have been shifting to less accommodative monetary policy settings while noting the high degree of uncertainty in the outlook.
Last week, the BoE announced a second increase in the Bank Rate of 25bps (5-4 majority, with the minority of 4 preferring a 50bps increase). Further ‘modest increases will be appropriate’ if the economy develops as forecast. The BoE announced its intention to begin QT. It will only start the process of actively selling govt bonds once the Bank Rate reaches 1% and expects to fully unwind its corporate bond holdings by ceasing to reinvest maturing assets and a program of corporate bond sales. BoE Governor Bailey is also scheduled to speak this week.
The ECB statement implied ‘accommodative for longer’ but the press conference signaled a potential change in outlook. When asked, President Lagarde no longer ruled out a rate increase in 2022 – but did not confirm it either. Instead, she noted that the ‘situation has indeed changed’ referring to the two higher-than-expected inflation reports in Dec and Jan. In Dec, the ECB had signaled that it no longer considered that it was a low inflation environment and, at this meeting, further noted the upside risk to inflation. President Lagarde stated that ‘we are getting much closer to target’ on inflation. At the Mar meeting, the inflation projection will be revised and a more formal update to the outlook will likely be provided. The end of the Pandemic-era QE program (PEPP) was announced – with reinvestments to continue until at least the end of 2024. The ‘regular’ QE program (APP) stays in place, but with a schedule of tapered purchases through to Q4. ECB President Lagarde will give introductory remarks this week.
The RBA announced the end of its bond-buying program with no further purchases after 10 Feb. There was no change to interest rates. There was no further guidance on the path of rates, except that the Board is willing to be patient on how various factors affecting inflation continue to evolve. The Board noted that unique conditions have led to higher inflation – and these factors are expected to dissipate. Underlying inflation is only just in the target band for the first time in seven years and is too early to say that inflation is in the target band “sustainably so”. Governor Lowe’s speech the next day provided more context. The bank has an opportunity to be patient in acting on inflation (and rates) and achieve a historical milestone of the unemployment rate below 4%. When asked though, Governor Lowe hedged his bets and stated that it was plausible that rates could increase later in 2022, or they could not.
US payrolls last week recorded a strong upside surprise. Revisions resulted in a net gain in payrolls over the year of +217k. The annual revisions indicated more momentum in the US labour market than previously thought. Despite the strong Jan report, hours worked declined in the month highlighting some underlying weakness. The Jan ISM’s recorded slower momentum due to renewed disruptions, higher prices, and labour availability. There were more notable pockets of weakness at an industry level, especially in the services report.
The week ahead
US CPI for Jan is the main focus this week. Consumer price growth is expected to have accelerated further to 7.3% in Jan (from 7% in Dec). The month-on-month CPI growth is expected to remain at 0.5%.
This week, the US Treasury will auction and settle approx. $241bn in ST Bills, raising approx. $31bn in new money. The US Treasury will auction the 3yr and 10yr Note, and the 30yr Bond this week which will settle next 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 | Jan 31, 2022
Key themes for the week ahead – central bank meetings and US non-farm payrolls
This will be another big week of economic data and central bank meetings.
Recap
Last week, the FOMC announced the end of QE in Mar (end of tapering) and signaled that it would be appropriate to start rising the FFR target soon. Over the weekend, the Atlanta Fed President noted that a more aggressive approach to increases was possible “if warranted by the economic data”. A separate note was released after the meeting outlining the broad principles of QT. The PCE price index growth for Dec came in below forecast at 5.8%, but still ahead of the Nov rate of 5.7% while monthly growth remained elevated at 0.45%. Annual core PCE price growth accelerated to 4.85%. GDP growth accelerated more than expected in Q4 led by a notable contribution from a larger change in inventories.
The BoC kept rates unchanged, but “decided to end its extraordinary commitment to hold its policy rate at the effective lower bound”. The bank is signaling that rates will be “on a rising path”.
Central Bank Meetings
The RBA is expected to keep rates on hold and will possibly announce the end of QE/tapering. CPI growth was higher than expected, but core CPI remains within the 2-3% band. Current strong labour market conditions are expected to ease given the latest outbreak. The RBA may signal rate increases to start this year, rather than in 2023, but it is likely the RBA would prefer to see wage growth increase first.
The BoE is expected to hike rates again and may announce its program to start reducing its balance sheet. We haven’t seen a situation when multiple CBs are reducing balance sheets at the same time.
The ECB is expected to keep rates on hold with no change in current settings. CPI growth remains more moderate excluding energy. Last week, Q4 GDP was slower across major economies and the German economy contracted by more than forecast in Q4.
US Non-Farm Payrolls
This week US non-farm payrolls are expected to increase by a more moderate +155k jobs (versus +199k in Dec). There has been some easing of momentum in Jan, especially in services and some regional manufacturing surveys (the latest outbreak is impacting staffing and output). Wage pressures eased more than expected in Q4 with the employment cost index increasing by 1% (versus 1.3% in Q3). This month, the participation rate is expected to fall slightly from 61.9% to 61.8% but the unemployment rate is expected to remain at 3.9%. The more detailed ISM surveys for US manufacturing and services activity will also be released for Jan this week. Both surveys are expected to show slightly slower growth momentum for the month.
This week, the US Treasury will auction and settle approx. $465bn in ST Bills, Notes, Bonds, TIPS, and FRNs, raising approx. $121bn in new money. Approx. $55bn in ST Bills, Notes, FRNs, and Bonds will mature on the Fed balance sheet this week and will be rolled over. The US Treasury will also release the latest financing schedule on 2 Feb.
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.