by Kim | Feb 26, 2024
Key events this week; Inflation – US PCE inflation, Euro Area CPI, Japanese CPI, Aus CPI; US & Canada Q4 GDP; RBNZ Rates Decision
Recap from last week
Central bank minutes and speeches were in focus last week. The message theme from the FOMC & ECB minutes and speeches was; patience on rate cuts.
FOMC guidance shifted to rate cuts as the bias for the next move in policy rates. Guidance was changed as the upside inflation risk has diminished and this is likely the peak in policy rates. However, rate cuts may take longer to materialize – the Committee needs greater confidence that inflation is moving sustainably to 2%. The minutes note balancing the risk of cutting too early and stalling progress on inflation, with the risk of maintaining an ‘overly restrictive’ stance for too long. With the broader economy doing well, there is time to be patient. The Jan US CPI & PPI placed a question mark over the progress on disinflation. Since then, some speeches have suggested a need to see broader disinflation among goods and services to be more confident inflation is moving back down. Governor Waller’s speech last week noted that the Jan CPI report likely pushed back the timing of rate cuts to verify whether the Jan result was noise or the start of the new trend. Governor Waller specifically noted that the uptick in inflation was spread more widely among goods and services. He also noted that there was no rush to start to normalize policy rates but still expects to start that process this year.
One thing that is clear is that by many metrics, the U.S. economy is healthy and well positioned to continue growing and adding jobs.
That makes the decision to be patient on beginning to ease policy simpler than it might be. I am going to need to see at least another couple more months of inflation data before I can judge whether January was a speed bump or a pothole. Source: Governor Waller, speech 22 Feb 2024
The other important point from the minutes was that the FOMC will begin discussing ‘balance sheet issues’ at the Mar meeting to ‘guide an eventual decision to slow the pace of run-off’.
The ECB minutes held a similar message; that patience was still needed. Policy rates were kept on hold at the Jan meeting. Even though inflation had eased, progress on disinflation remained fragile, and loosening policy rates too early could undo some of the progress.
The RBA minutes outlined the case to keep rates on hold. Only two policy options were discussed – to hike or to hold. The risk that inflation wouldn’t return to the target range had eased, however, it would still be some time before the Board was sufficiently confident that inflation would return to target in a reasonable timeframe. The costs of inflation not returning to target in a reasonable timeframe were potentially very high; which led the Board to agree that it was appropriate not to rule out a further increase in the cash rate. The latest wage price index for Q4 was slightly higher than expected and real wages came in slightly positive for the first time since early 2021. With the CPI retreating and the WPI staying high after years of slower growth, the RBA will be monitoring how consumer spending will respond and what it means for inflation.
The overall direction of the Feb prelim PMIs for the G4 (plus Aus) was a continued improvement in services growth while manufacturing activity stayed little changed and in contraction. There were several crosscurrents this month. The US was an exception with a notable overall improvement; US manufacturing output expanded at a faster pace and services activity continued to expand at a modest pace. Japanese manufacturing returned to a sharp contraction in Feb. Eurozone services growth returned to expansion while manufacturing activity remained weaker, led by the renewed downturn in German manufacturing.
Outlook for the week ahead
Global inflation and growth data will be in focus this week and both will be important inputs as central banks consider the path of policy rates and the implications for the timing of policy adjustments.
US PCE inflation, the FOMC preferred inflation measure, is expected to increase at a slightly faster monthly rate, given some of the Jan PPI results. Headline PCE inflation is expected to ease to +2.4% over the year, but increase by +0.3% over the month (up from +0.2% in Dec). For comparison, the latest FOMC median headline PCE inflation projection is +2.4% for the end of 2024. Core PCE inflation is expected to ease further to +2.8% from +2.9% in Dec. Monthly core PCE inflation is expected to increase by +0.4% over the month, up from +0.2% in Dec. The FOMC median projection for core PCE for 2024 is also +2.4% – the Jan result would still be above that level.
Growth data for the US includes the second estimate for Q4 GDP which is expected to stay around the +3.3% (annualized) rate for Q4. This would mean that growth over the year in 2023 would be +3.1% – which is above the FOMC median growth projection for 2023 of +2.6%. There will also be a wide range of US income, spending, housing, and industrial activity data for Jan and Feb, including the ISM manufacturing PMI for Feb. These data will feed into a comprehensive update of the Atlanta Fed GDPNowcast for Q1 US growth – which currently sits at +2.9%. The FOMC median projection is for growth to slow by the end of 2024 to +1.4%.
There will be several Fed speeches, including NY Fed President Williams, Governor Waller (responding to a paper titled, “Quantitative Tightening Around the Globe; What Have We Learned?” – which may start to lay the groundwork for changes to QT), and Fed Governor Kugler.
The Aus monthly CPI for Jan is expected to increase to +3.5% (from +3.4% in Dec).
The Euro Area prelim CPI for Feb is expected to continue to moderate. Headline CPI is expected to slow to +2.5% in Feb (from +2.8% in Jan). Core CPI is expected to ease to +2.9% in Feb (from +3.3% in Jan).
Japanese National CPI figures for Jan will be released early this week. Headline inflation is expected to ease to +2.5% in Jan (from +2.6% in Dec). The BoJ preferred measure of CPI ex fresh food is expected to ease to +1.9% in Jan (from +2.3% in Dec). Core CPI (ex-fresh food and energy) is still running at approx. +3.7% but is also expected to ease. This will be an important input for the BoJ as it considers the case for and timing of its potential exit from the negative rates regime.
Canadian Q4 GDP is expected to return to growth of +0.8% annualized (from -1.1% in Q3).
The RBNZ will meet this week and is expected to stay on hold at 5.50%. There has been some speculation that the RBNZ may raise its policy rate further.
The broader global suite of S&P PMIs for Feb will be released towards the end of the week – starting with global manufacturing activity.
This week, the US Treasury will auction and settle approx. $668bn in ST Bills, Notes, Bonds, and TIPS raising approx. $137bn in new money.
QT: Approx $20bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $29bn in Notes & Bonds will mature on the Fed balance sheet and be redeemed/rolled off the balance sheet.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Kim | Feb 19, 2024
Key events this week – Central bank minutes – FOMC, RBA, & ECB; US Fed speeches – Waller, Jefferson, Cook; Inflation – Euro Area CPI, Canada CPI & Aus wages; Prelim S&P PMIs Feb
Recap from last week
US headline CPI for Jan came in higher than expected but continued to slow. Despite headline CPI easing from +3.4% in Dec to +3.1% in Jan, expectations were for a larger moderation to below +3%. Core CPI stayed elevated at +3.9% in Jan, unchanged from Dec, with the monthly rate rising to +0.4%. The trimmed mean and median inflation measures accelerated in Jan suggesting that inflation pressure was likely broader than it had been in recent months. The US PPI also came in higher than expected – especially the monthly rate. Some PPI measures feed into the preferred PCE inflation measure used by the FOMC, raising some concerns over persistent inflation. Markets continued to push out the timing of the first US rate cut – currently pricing in Jun.
Fed-speak provided a mixed view on whether the inflation impulse in Jan would change the FOMC outlook on inflation progress and the path of rates. A speech by Richmond Fed President Barkin noted that “given the strong labor market and robust demand, the FOMC has time to build confidence before toggling rates down” (Source; Bloomberg). Themes focused on “patience” and “looking for more conviction that slowing inflation is broadening and sustainable”. Concern was noted that progress on disinflation has focused on goods (energy, core goods), which may not persist, while progress on services disinflation has been slower. The FOMC minutes and several important Fed speeches this week may help to put the latest CPI and PPI results into a broader context.
Other US data last week was mixed. Consumption growth slowed in Jan and the revision to Dec indicated that retail growth at the end of Q4 had not been as strong. Consumption growth also stalled in real terms. Industrial production and manufacturing output fell in Jan. US regional manufacturing surveys for Feb showed conditions stabilized following the weakness in Jan and sentiment in the business outlook continued to improve. The prelim Feb PMIs will be out this week providing further insight into growth momentum. Housing data was mixed with permits and starts weaker than expected in Jan, however, home builder sentiment continued to improve in Feb.
Overall, the latest Atlanta Fed GDPNowcast for Q1 US GDP growth edged lower to +2.9% mostly on slower consumption growth. The run rate for US growth is still elevated, especially compared to the weaker growth picture emerging outside of the US. Last week, the prelim Japanese GDP for Q4 contracted for the second quarter in a row by -0.1% (expecting +0.3%) with the decline in Q3 revised lower to -0.8%. The decline in Q4 GDP was led by another fall in real private consumption. Similarly, UK GDP fell by -0.3% in Q3, after falling by -0.1% in Q3. Net trade and household consumption were the largest contributors to the fall in Q4 – although UK retail sales growth in Jan reversed the large fall in Dec. Euro Area GDP growth in Q4 remained stalled at 0%, after falling slightly by -0.1% in Q3.
Outlook for the week ahead
Central bank meeting minutes and FOMC speeches will be a key focus this week.
Minutes for the RBA, ECB, and FOMC meetings will be released this week. The FOMC minutes should provide details around the evolution of guidance at the Jan meeting; that the bias remains to stay on hold, looking for further confidence that inflation is sustainably on the path to 2% before commencing rate cuts.
There are several important US Fed speeches worth noting this week given the Jan inflation results, and what it might mean for the path of rates. On Wednesday, Governor Michelle Bowman will speak (in Washington, DC) an hour before the FOMC minutes are released, on “View from the Federal Reserve”. Three speeches are scheduled for Thursday (from lunchtime to evening – note various locations, for timing purposes), starting with Vice Chair Jefferson speaking on the “US Economic Outlook and Monetary Policy” at 10 am (Washington, DC). This will be followed by Governor Cook speaking at 5 pm (at Princeton, NJ). Finally, and importantly, Fed Governor Waller speaks at 7 pm on Thursday on the “Economic Outlook” (Minneapolis, Minnesota) – this will likely provide important context around recent data and his view on what it means for the path of rate cuts. See the Federal Reserve calendar for more details this week.
The RBA minutes should provide details about the case to keep rates on hold, the view of domestic cost pressures, heightened uncertainty around the outlook, and the decision to adjust guidance to not rule out the option of a further rate hike.
The ECB minutes should also provide more detail about deliberations to keep rates on hold amid faster progress on inflation and stalling growth.
There will be inflation data released this week. The final Euro Area CPI in Jan is expected to confirm +2.8% headline CPI and +3.3% core inflation. Canada CPI for Jan is expected to slow to +3.2% in Jan with BoC measures of core inflation staying elevated at +3.6%. Finally, the Aus Wage Price Index for Q4 is expected to show some moderation in wage growth over the quarter to +0.9% in Q4 from +1.3% in Q3. Annual growth in wages is expected to stay elevated at +4.1% at the end of Q4.
Finally, the prelim G4 PMI’s for Feb will be released this week. Headline manufacturing PMI’s improved in Jan, though generally stayed below 50. The US manufacturing PMI was one exception, moving slightly above 50, despite output remaining in contraction. Services PMI’s also continued to improve in Jan led by moderate expansion in the US, Japan, and the UK.
This week, the US Treasury will auction and settle approx. $548bn in ST Bills and FRN’s raising approx. $86bn in new money. QT this week: Approx $15.6bn 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 | Feb 12, 2024
Key events this week – US CPI, PPI, & retail sales, Aus labour market survey
Recap from last week
Among the larger economies, central bank guidance continues to shift from an outright tightening bias to maintaining current interest rates. Recent guidance from the FOMC, the BoE, and the ECB suggests that policy rates have likely peaked but may need to stay at current restrictive levels to continue to bring inflation back to target.
The RBA and the BoC have not fully ruled out the need for further rate hikes as policy rates stay on hold. Last week, the RBA kept rates unchanged while guidance maintained the optionality for a further increase in rates, depending on the evolution of data. Disinflation in Aus has not yet progressed as fast, and measures of domestic-led inflation remain elevated. The RBA also cited a highly uncertain outlook and a priority to return inflation to target among its reasons to keep policy rates unchanged. The updated forecast assumptions in the latest SoMP were based on a cash rate of 3.9% in H2 2024. The BoJ remains the outlier as it considers dismantling YCC and negative rates.
In Jan, the FOMC was more explicit in its guidance that the bias for the next move may be a cut in rates – but that cuts may take longer to materialize. Speeches by Fed officials last week continued to affirm there is no rush to cut rates. Fed Chair Powell made it clear in the recent press conference Q&A that the FOMC no longer expects weaker growth or rising unemployment to see further progress on inflation. However, having confidence that inflation is moving sustainably to 2% means seeing more than six months of good data. Not better data – just more good data;
“The question really is, that six months of good inflation data, is it sending us a true signal that we are, in fact, on a path, a sustainable path down to 2 percent inflation? That’s the question. And the answer will come from some more data that’s also good data. It’s not that the six-month data isn’t low enough. It is. It’s a question of, can we take that with confidence that we’re moving sustainably down to 2%?” US Fed Chair Powell, Press Conference Q&A, 31 Jan 2024
US Fed Governor Waller’s speech in Jan indicated that one hurdle on the path of ‘good inflation data’ was the update to US CPI seasonal adjustment factors released last week and whether it affected the trend of disinflation during 2023. Importantly, there was no notable revision to the path of disinflation over the last year, and this implies no change in policy guidance.
Data flow was minimal last week. US activity reflected in various industry PMIs remained positive and suggested that growth ticked higher at a moderate pace in Jan. The US S&P manufacturing PMI lifted back above the neutral 50 level in Jan while the expansion in services activity continued to accelerate at a moderate pace. The latest US Fed senior loan officer opinion survey for Q4 suggests that lending standards were tightened in Q4, but that a “lower net share of banks reported tightening standards compared to Q3”.
The Global S&P PMIs suggested that economic activity increased in Jan as growth in orders and output increased to a ‘seven-month high’. Global services activity increased at the fastest pace in six months while manufacturing activity also shifted back into expansion led by output growth in consumer goods. Pockets of weak manufacturing conditions remain in the Euro Area (Germany and France).
Outlook for the week ahead
After stronger US payroll data for Jan, the focus shifts to US inflation, consumption, housing, and industrial data to round out the view of US economic activity at the start of 2024. The Atlanta Fed GDPNowcast for Q1 is still based on limited data and currently sits at an elevated +3.4%. The next update will be this week on 15 Feb.
US CPI for Jan is expected to be another ‘good’ inflation report for the FOMC. Headline CPI is expected to ease to +2.9% over the year in Jan (from +3.4% in Dec) and increase by +0.2% over the month in Jan (unchanged from +0.2% in Dec). Core CPI is expected to stay elevated at +3.8% over the year in Jan (down only slightly from +3.9% in Dec) and stay at +0.3% over the month in Jan (unchanged from +0.3% in Dec).
The US PPI for Jan will also be released this week; the headline PPI is expected to ease to +0.7% over the year in Jan (from +1% in Dec). Core PPI is expected to ease to +1.6% over the year in Jan (from +1.8% in Dec).
US retail sales growth is expected to stall in Jan at -0.1% after the much stronger than expected growth in Dec of +0.6%. The prelim reading from the University of Michigan consumer sentiment survey for Feb is expected to show a continued improvement in consumer sentiment as inflation eases.
The first view of US regional manufacturing surveys for Feb will be released and are expected to show a small improvement in activity compared to Jan. US industrial production in Jan is expected to increase by +0.3%, up from +0.1% in Dec.
US housing data for Jan is expected to be little changed as mortgage rates stabilize. New housing permits are expected to increase to 1.515m (SAAR) in Jan while housing starts are expected to increase slightly to 1.47m (from 1.46m in Dec).
There will be several Fed speeches this week, including Governor Waller (“The Dollar’s International Role”).
Aus labour market data for Jan will be released this week. The latest RBA decision noted that conditions continue to ease, but “remain tighter than is consistent with sustained full employment and inflation at target”. Net employment growth is expected to rebound to +20k in Jan (from -65k in Dec) as participation is expected to increase to 66.9% and the unemployment rate edge up slightly to 4% (from 3.9% in Dec).
UK data will be in focus this week including the latest Q4 GDP, labour market for Dec, and retail sales and CPI for Jan.
This week, the US Treasury will auction and settle approx. $595bn in ST Bills, Notes, and Bonds raising approx. $67bn in new money.
US QT this week: Approx $23.7bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $31bn in Notes and Bonds will be redeemed.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Kim | Feb 5, 2024
Key events this week – RBA monetary policy meeting, US CPI seasonal factors, US ISM Services PMI, S&P global services PMI’s
Recap from last week
As expected, the FOMC kept rates on hold last week. Guidance evolved in line with a series of changes over the last several meetings that more overtly pave the way to easing later this year;
We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. US Fed Chair Powell, 31 Jan 2024, FOMC press conference
At the same time, Fed Chair Powell warned that rate cuts may take longer to materialize. He noted that the economy “has surprised forecasters in many ways since the pandemic” and even at this stage progress to the 2% inflation target ‘is not assured’. Later in the press conference, Chair Powell pushed back on the possibility of rate cuts starting at the Mar meeting. He did note that the FOMC would start in-depth discussions on balance sheet issues and run-off at the Mar meeting.
The FOMC is balancing policy amid slowing but elevated inflation, solid growth, and strong job gains. Cut too early, or too much, and risk the progress made on bringing down inflation. But cut too late and risk too much weakening in the labor market. Policy is currently tilted to ‘not cutting too early’ and for the moment, the FOMC will maintain the current restrictive stance of policy until it has “gained greater confidence” that inflation is moving sustainably toward 2%.
US data last week indicated that the labor market and growth are not yet weakening. US non-farm payrolls were strong for Jan at +353k (well above expectations for +173k) and revisions for the prior two months were notable at +126k payroll jobs. The revisions across 2023 suggest that payroll growth has been higher and has been accelerating over the last few months. This challenges the narrative that hiring has been slowing.
The picture from other labor market measures suggests that conditions have slowed (or are slowing) back to more ‘normal’ levels. The unemployment rate in Jan fell to 3.66%, just above the pre-pandemic level of 3.56% (Jan 2020). Average weekly hours and growth in aggregate hours have slowed through this tightening cycle, especially in Jan. JOLTS vacancies strengthened a little in Dec and are still above pre-pandemic levels while layoffs and discharges are still at the series low rate of 1.0%. There are a few crosscurrents in the labor market view. The forward-looking initial claims remain low, but continuing claims have been rising (the NSA series is at a two-year high in the latest week, while the SA series is trending higher). The Challenger survey for Jan showed a much smaller number of hiring announcements over the last two months amid a renewed rise in layoff announcements.
Wages growth indicators remain elevated, and this is likely to weigh on the FOMC. The ECI for Q4 showed continued progress with wage growth slowing to +4.1% at the end of Q4 but remaining elevated and above the pre-pandemic average of +2.4%.
The other standout in data last week was the improvement in US manufacturing surveys. The S&P and ISM manufacturing PMI surveys for Jan showed stronger growth in demand and an improvement in the outlook for output growth. The prices component increased across both surveys.
The Atlanta Fed GDP Nowcast kicked off US Q1 2024 growth at +4.2% – but based on limited data.
Globally, manufacturing conditions also improved in Jan. The S&P Global manufacturing PMI moved back to a neutral 50 level for the first time in over a year. Output increased while the contraction in new orders eased further. The positive outlook for output growth continued to strengthen. Input price growth also accelerated.
Outlook for the week ahead
The main focus this week will be the RBA meeting, the US CPI updated seasonal adjustment factors, and the services components of the Jan PMI surveys.
The RBA will meet for the first time this year with a new approach including fewer meetings and post-meeting press conferences. The RBA is expected to stay on pause at this meeting. The Aus Q4 CPI report last week likely reduced the case for further tightening (some were still expecting one more hike) as inflation slowed more than expected and more than forecast by the RBA. Pockets of persistent and still elevated inflation remain in the non-tradable and services views – but neither is accelerating now. For the RBA, it will likely be more of a case of how long to hold policy rates here to ensure that inflation, especially in the services/non-tradable sector comes down further. Other data suggests policy settings are having an impact. Aus retail sales in Dec were much weaker than expected, and more than reversed the Black Friday sales growth in Nov. The Dec labor market report was also weaker than expected.
One of the important releases this week will be the updated CPI seasonal adjustment factors on Fri 9 Feb (here). This will help determine the extent of revisions to CPI through 2023. This has been noted as an important hurdle for the path of rates policy. The actual Jan US CPI report will be released the following week.
Other US data includes the ISM services PMI for Jan, consumer credit data, and the Q4 Senior Loan Officer Opinion survey. There will also be several US Fed speeches, including Fed Chair Powell on 60Minutes (already gone to air at the time of writing).
The global services PMIs for Jan will round out the view of growth momentum at the start of 2024.
This week, the US Treasury will auction and settle approx. $474bn in ST Bills raising approx. $55bn in new money. The US Treasury will also auction the 3-year and 10-year Notes and the 30-year Bond this week – to settle next week.
QT this week: Approx $13.1bn 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 | Jan 29, 2024
Key events this week – FOMC and BoE meetings, US non-farm payrolls, Aus Q4 CPI, Euro Area prelim CPI & GDP Q4
Recap from last week
There was more good news on US growth and inflation last week. US GDP growth came in higher than expected at +3.3% annualized in Q4, beating expectations for a moderation to +2%. GDP growth has not slowed as much as the FOMC expected. At the end of 2023, the median projection for GDP growth over 2023 was upgraded to +2.6% (range between +2.5% and +2.7%) – the actual year-on-year growth rate in the advance Q4 GDP release last week was +3.1%.
Importantly, against this backdrop of more buoyant growth, US PCE inflation continued to ease. Headline PCE inflation stayed at +2.6% over the year with the monthly pace rising to +0.2% as expected. This has again come in below the FOMC median projection for the 2023 inflation rate of +2.8% and is below the lower bound of the projection range (+2.7% to +3.2%). These projections were only updated at the recent Dec FOMC meeting – suggesting that inflation is still easing faster than the FOMC expected. Annual core PCE inflation eased from +3.2% in Nov to +2.9% in Dec. The core PCE inflation rate also came in well below the FOMC median projection of +3.2% over the year ending Dec and well below the lower bound of the projection range (+3.2% to +3.7%).
The BoC and ECB kept policy settings unchanged. BoC deliberations shifted from whether policy is restrictive enough, to how long to maintain the current level of restrictive rates. The ECB noted that restrictive policy settings are helping to push down inflation. While inflation is expected to ease further, it was premature to discuss rate cuts at this meeting. The BoJ also kept policy settings unchanged. However, a more meaningful shift in policy was hinted at during the press conference. The BoJ could have enough information on wage growth by the Apr meeting to decide on a shift away from negative interest rates with the possibility of several interest rate increases to follow.
The Jan prelim PMIs among the G4 suggested an improvement in growth momentum at the start of 2024. Services output growth accelerated while manufacturing PMIs became less negative. The lengthening of lead times was a theme among manufacturing PMI reports in Jan – due to conflicts in the Red Sea. There was a general link between an improvement in headline manufacturing PMIs and a less severe contraction in the manufacturing output index. The US headline manufacturing PMI improved to above 50 in Jan – somewhat at odds with the weaker US regional manufacturing surveys.
Outlook for the week ahead
The FOMC meets this week and is broadly expected to keep policy settings unchanged at this meeting. Signaling on the outlook will be important, especially given better growth and inflation metrics, but we don’t expect to have a clear timing regarding the start of policy calibration. Despite the good inflation report for Dec, Governor Waller previously noted that the annual CPI revisions in the upcoming Jan report will be an important hurdle to confirming the inflation picture ahead of any policy changes. Governor Waller also noted that risks to the employment and inflation mandates have become more balanced – so more focus on labor market metrics could start to feature for the FOMC.
The US Jan labor market reports will be important later this week. While non-farm payrolls were elevated in Dec, the overall picture was mixed as weaker hiring and employment were offset by a fall in participation. Non-farm payrolls are expected to increase by +173k in Jan (+216k in Dec). Revisions to past payroll growth will stay in focus. The unemployment rate is expected to increase slightly to 3.8% (from 3.7%), which suggests either a softening in employment growth or a rebound in participation (or a mix of both). The level of job openings is expected to be little changed at 8.75m in Dec (an approximate vacancy rate of 5.3%). Governor Waller’s recent speech highlighted that a vacancy rate of 4.5% is an important benchmark for the outlook of labor market conditions.
The BoE will meet this week and is expected to keep policy settings unchanged.
Euro Area growth is expected to stay at a stalled pace while inflation continues to ease. Euro Area GDP growth for Q4 is expected to stay slightly negative at -0.1% over the quarter and at 0% over the year. The prelim Euro Area headline inflation rate for Jan is expected to ease to +2.8% (from +2.9% in Dec). Core inflation for the Euro Area is expected to ease to +3.2% (from +3.4% in Dec).
The Aus quarterly CPI for Q4 will be released this week ahead of the RBA meeting next week. Headline inflation is expected to slow to +0.8% over the quarter (from +1.2%) and to +4.3% over the year (from +5.4%).
The full suite of S&P global PMIs for Jan will be released, starting with manufacturing this week.
The US Treasury will provide its latest quarterly refunding announcement for Q1 and Q2 – on 29 and 31 Jan.
This week, the US Treasury will auction and settle approx. $690bn in ST Bills, Notes, Bonds, FRNs, and TIPS raising approx. $96bn in new money.
QT: Approx $16.4bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $27.6bn in ST Bills, Notes, Bonds, and FRNs 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 | Jan 22, 2024
Key events this week – Central banks; BoJ, BoC, and ECB, US PCE inflation, Prelim PMIs Jan
Recap from last week
As markets anticipate the start of the US rate-cutting cycle, US Fed Governor Waller provided important context and markers around the FOMC projections of (a median of) three rate cuts through 2024. He was clear on one thing; the FOMC will now likely have a more balanced focus between the dual mandates of 2% inflation and full employment as it moves to calibrate policy settings.
While the emphasis of policy since that time has been on pushing down inflation, given the strength of the current labor market the FOMC’s focus now is likely to be more balanced: keeping inflation on a 2 percent path while also keeping employment near its maximum level. Today, I view the risks to our employment and inflation mandates as being more closely balanced. Source: Governor Waller, Speech at The Brookings Institution
Labor demand has slowed through the tightening cycle via a lower vacancy rate (from a peak of 7.5% to 5.3% in Nov) while unemployment/involuntary separations have stayed low. According to Waller’s research, the US labor market is approaching a point where a lower vacancy rate could mean a notable increase in unemployment;
We showed in our research that if the vacancy rate continued to fall below 4.5 percent there would be a significant increase in the unemployment rate. So, from now on, the setting of policy needs to proceed with more caution to avoid over-tightening.
Waller noted that economic activity and the labor market ‘was in good shape’ and he was ‘more confident than since 2021’ that inflation was on the path to 2%. To keep the economy on this trajectory, the FOMC can consider lowering the policy rate “to keep the real policy rate at an appropriate level of tightness” without the need to “cut as rapidly as in the past”. Data dependence remained the important caveat. On the subject of timing, more information would be needed “in the coming months” to confirm that inflation is on a sustainable path to 2%. One important hurdle on that path is the Jan CPI revisions (9 Feb) – along with key labor market reports.
US data last week was in line with the recent shape of US growth trends – led by robust consumer spending and weakness in manufacturing. Consumer retail sales growth was higher than expected in Dec. Anecdotes in the Fed Beige Book also noted strong consumer holiday spending and increased leisure travel. Consumer sentiment moved higher at the start of Jan and initial claims fell below +200k.
Manufacturing activity stayed weaker. The NY Empire State Manufacturing survey for Jan showed widespread contraction in orders and the Beige Book noted that nearly all districts reported decreases in manufacturing activity. Within the industrial production report, manufacturing output in Dec was up +0.1% in Dec.
US housing data was mixed as mortgage rates continued to ease. Home builder sentiment increased by more than expected but the recovery was uneven across the regions. Mortgage applications continued to grow. Housing permits were higher, housing starts were lower, and completions rose notably into the end of 2023. Existing home sales fell in Dec to a new pandemic low.
Piecing this together, the advance release of US GDP this week is expected to show that growth slowed to +2% in Q4 from the very fast pace of +4.9% in Q3.
Outlook for the week ahead
The main focus this week will be US PCE inflation. This is the preferred measure of inflation for the FOMC and a further slowing of inflation will be important for sentiment around the timing of rate cuts. US PCE inflation for Dec is expected to be +2.6% (unchanged from Nov) over the year and +0.2% over the month. Core PCE inflation is expected to slow to +3% in Dec from +3.2% in Nov and increase to +0.2% over the month (from +0.1% in Nov). The FOMC projections for 2023 year-end PCE inflation are; +2.8% headline and +3.2% core. The FOMC meets next week.
There will be several central bank meetings this week. Settings are expected to be unchanged however central banks may start to adjust guidance as inflation eases. The Bank of Japan is expected to keep policy settings unchanged. Last week, the Japanese national CPI continued to improve as headline and core inflation rates slowed.
The Bank of Canada is expected to keep policy settings unchanged. At the prior meeting, the BoC noted that there had been clearer signs that monetary policy was helping to moderate spending and relieve price pressures. The increase in Canada’s headline CPI in Dec was partly the result of gasoline price base effects. The trimmed mean inflation rate increased to +3.7% from +3.5% in Nov suggesting some persistence in underlying inflation. The latest BoC Business Outlook Survey noted some softening in firm’s output price growth, however, wage growth was ‘expected to ease only gradually’.
The ECB is also expected to keep policy settings unchanged at this meeting. At the last meeting, the ECB noted that inflation had eased, but that domestic price pressures remain elevated. The Euro area CPI for Dec was confirmed at +2.9% – higher than in Nov but a ‘temporary’ increase was expected at the last ECB meeting. Underlying inflation continued to ease, and slowed to +3.4% in Dec.
Finally, the prelim S&P PMIs for Jan will be released this week providing some insight into growth momentum at the start of 2024.
This week, the US Treasury will auction and settle approx. $496bn in ST Bills raising approx. $49bn in new money. The US Treasury will also auction the 7-Year, 5-Year, and 2-Year Notes and the 2-Year FRN this week – to settle at the end of the month (next week).
QT this week: Approx $12.2bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $2bn in ST Bills 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
