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The Macro Outlook for w/c 17 February 2025

by Kim | Feb 17, 2025

Key events this week – FOMC minutes, RBA & RBNZ meetings, CPI; Japan, UK, & Canada, Prelim S&P PMIs Feb

Recap from last week: US CPI firms, but PPI offers hope for softer core PCE inflation.

The US CPI and PPI releases for Jan offer key insights into the likely trajectory of the Fed’s preferred PCE inflation measure, due out on 28 Feb. While there wasn’t much to like about the firmer CPI results, the picture of US PCE inflation in Jan became a little more constructive after the PPI report.

The headline and core CPI results for Jan all came in higher than expected across both monthly and annual timeframes. Annual headline CPI increased to +3% while core CPI increased to +3.3% in Jan, both higher than in Dec. Monthly headline and core inflation accelerated to +0.5% in Jan, on par with the high readings from a year ago, adding further weight to the concern that progress on disinflation may have stalled. One positive from the report was that annual shelter inflation continued to slow. The PPI results for Jan were also higher than expected with headline PPI increasing to +3.5% over the year (expecting +3.1%). PPI inflation accelerated in the latter half of 2024. While not as high as in 2021/22, many PPI measures are now higher than they were a year ago.

Importantly, the increase in the individual PPI components that feed into the Fed’s preferred PCE inflation measure was more moderate in Jan. Together with the CPI result, suggests that the Fed-preferred annual core PCE is likely to decelerate in Jan. The FOMC is looking for further progress on annual core PCE inflation before it will continue cutting rates. Progress on core PCE inflation had mostly stalled through 2024, slowing to +2.6% through the middle of the year, then remaining at +2.8% for the last three months. Using the Cleveland Fed CPI nowcast for core PCE in Jan of +0.37%, and assuming no revisions, annual core PCE would slow to +2.66% in Jan. While this represents some progress, a monthly reading on core inflation of +0.37% would be elevated for the Fed, especially after more benign readings in Nov and Dec. The details of the report will be important.

During his testimony last week, US Fed Chair Powell noted that the Fed still has more work to do, and remains in no rush to lower rates.

“Last year, inflation was 2.6% — so great progress — but we’re not quite there yet,” Source: Bloomberg, 13 Feb 2025

The FOMC also wants to understand and assess the potential impact of new policy measures on inflation and the economy. The inflation outlook is still clouded by some uncertainty over the form of tariffs and other policy measures.

The US GDP growth run rate has moderated so far in Q1. The Atlanta Fed GDP nowcast for Q1 growth slowed to +2.3% at the end of last week. The slowdown from the prior week was mostly due to the sharper-than-expected fall in US retail sales of -0.9% for Jan, led by notable falls in motor vehicles and non-store sales. For now, the fall in Jan retail sales follows stronger retail sales growth in the back half of 2024. US industrial production growth slowed in Jan as manufacturing and mining output declined, and was partially offset by a notable increase in the output of utilities, due in part to cooler weather.

The prelim Q4 GDP growth for the Euro area came in slightly better than expected at +0.1% over the quarter (expecting 0%). This was still a step down from the somewhat more moderate pace of growth in Q3 of +0.4%.

UK GDP growth for Q4 was also better than expected at +0.1% over the quarter (expecting a fall of -0.1%) after no growth in Q3. The detail painted a less optimistic picture as household expenditure growth stalled, while business investment and net trade declined. This was offset by a positive contribution from the change in inventories and growth in government expenditure.

Outlook for the week ahead; FOMC minutes, RBA & RBNZ meetings, CPI; Japan, UK, & Canada, Prelim S&P PMIs Feb

This week, the focus shifts back to central bank decisions and key data. In the US, housing data for Jan will feed into a further update on the trajectory of growth so far in Q1. The prelim S&P PMIs for key developed markets in Feb will also provide a broader view of growth momentum and private sector sentiment through to the middle of Q1.

Key factors to watch this week;

The RBA and RBNZ will meet for the first time this year. The minutes of the Jan FOMC meeting will be released.

The RBA is expected to cut rates for the first time in this cycle from 4.35% to 4.1%. The latest Q4 CPI report was positive for the RBA, with core CPI slowing further towards the top of the target range. At the last meeting, there had been a notable shift in the RBA outlook on inflation, with the Board “gaining confidence that inflationary pressures are declining”. So far, the labour market has remained solid, retaining most of the pandemic gains in terms of higher employment, lower unemployment, and higher participation. Given the strength in labour market conditions, the guidance provided by the Board will be important for the outlook on the path to further rate cuts. The Aus labour market report for Jan will also be released this week.
The RBNZ is expected to cut rates by 50bps at its meeting this week. While inflation remained in the RBNZ target range for the second quarter in a row in Q4, growth and labour market conditions continued to deteriorate. GDP in Q3 contracted by -1% over the quarter (including revisions) while the unemployment rate increased to 5.1% in Q4, from 4.8% in Q3.
The minutes of the FOMC meeting on 29 Jan will be released.

Central bank speeches;

US Fed; Several speeches are worth watching this week, most notably Governor Waller’s address on the US economic outlook. Others include Governor Bowman (including brief remarks on the economy), Governor Kugler (navigating inflation), and Fed Vice Chair Jefferson (Household balance sheets).

US data releases this week will primarily focus on housing, but will also include the first regional manufacturing surveys for Feb. The housing starts data will feed into another update on the pace of GDP growth through Q1 so far.

US new housing permits are expected to ease slightly in Jan to a 1.46m annualized pace from 1.48m in Dec. New housing starts are expected to slow to a 1.39m annualized pace in Jan from 1.5m in Dec. Existing home sales are expected to ease to 4.13m units annualized in Jan.

CPI data for Japan, the UK, and Canada will provide important input for these central banks ahead of the next round of meetings in Mar.

The National CPI in Japan is expected to remain firm in Jan. The BoJ preferred measure of core CPI ex fresh food is expected to increase in Jan to +3.1% over the year from +3% in Dec. The BoJ increased rates at the last meeting, citing progress on inflation and positive developments in wage growth. Recent speeches continue to hint at further hikes as long as inflation and growth evolve according to the outlook, though the prospect of tariffs remains a key uncertainty. GDP in Q4 came in higher than expected at +0.7% over the quarter, or a +2.8% annualized rate (expecting +1%).
UK inflation and labour market data this week will provide an update for the BoE as it balances firming inflation with a slow growth backdrop. Headline CPI is expected to increase to +2.8% in Jan, up from +2.5% in Dec. Core CPI is expected to increase to +3.7% from +3.2% in Dec. At its last meeting, the BoE noted that headline inflation was expected to move up through the first half due to higher energy prices while underlying inflation was expected to wane. The Dec (rolling 3mth) UK labour market report will also be released this week, and the unemployment rate is expected to increase to 4.5%, up from 4.4% in Nov.
Canadian CPI for Jan will be released this week. The monthly decline of -0.4% in Dec was partially the result of a temporary break in the GST. This is also expected to be reflected in stronger retail sales in Dec. Annual inflation is expected to be little changed from +1.8% in Dec, with monthly inflation remaining flat at 0%. The BoC core measures are also expected to be little changed with the trimmed mean remaining at +2.5%. The BoC core measures averaged +2.3% in Dec.

Finally, the S&P prelim PMIs for the G4 plus Aus will be released later this week.

This week, the US Treasury will auction and/or settle approx. $640bn in ST Bills, Notes, and Bonds raising approx. $18bn in new money.

QT this week: Approx $50bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $15bn 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:

Weekly Macro Outlook – 17Feb2025 Download

Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net

The Macro Outlook for w/c 25 November 2024

by Kim | Nov 25, 2024

Key events this week – US Thanksgiving holiday, US PCE inflation & FOMC minutes, RBNZ meeting, more global CPI reports

Recap from last week: S&P prelim PMIs for Nov and global inflation reports; slowing growth and persistent inflation.

Broadly, the S&P flash PMIs for Nov offered a sobering preview of output growth among larger G4 nations midway through Q4. The manufacturing sectors of the G4 countries remained in contraction, and the previously resilient service sectors have begun to show signs of slowing momentum.

The clear exception in Nov was the US. It was the only G4 economy in the flash series with a positive and strengthening composite PMI. However, the underlying result was mixed as stronger services sector growth more than offset the renewed contraction of manufacturing output. The US manufacturing PMI remained in slight contraction, despite an improving outlook for manufacturing output growth. The US manufacturing PMI report noted lengthening lead times and slower declines in inventory as firms increased input purchases to front-run potential tariffs on imports.

US housing data was mixed. Existing home sales in Oct and new home builder sentiment in Nov both rebounded further. New housing building permits and housing starts were both slightly lower in Oct, likely due to weather effects, as well as firmer mortgage rates. There was only a small lift in the US Q4 GDP run rate and the latest Atlanta Fed GDP Nowcast increased to +2.6% at the end of the week. There will be a more substantial update to the US Q4 growth run-rate from data in the coming week.

US Fed speeches reinforced the themes of the US economy in a good position and rate cuts should continue to follow a recalibration path. Governor Bowman emphasized that the Fed has not achieved its inflation forecasts, and that progress on lowering inflation appears to have stalled. She also noted, similar to Dallas Fed President Logan last week, that the Fed may be closer to a neutral stance than we currently think. Markets are leaning towards pricing a slower pace of rate cuts. The current probability for another rate cut versus no change at the Dec meeting is becoming more evenly balanced (at the time of writing – see CME FedWatch).

Other developed market CPI data for Oct were mostly firmer than expected – though the weakening PMIs suggest that a backdrop of easing activity could support further falls in inflation.

Canada’s CPI was slightly firmer, especially across the core measures. However persistent services inflation did ease more than expected. The overall firmness of inflation in Oct could reduce expectations for another larger rate cut by the BoC in Dec. That assessment will be aided by Q3 GDP this week and growth is expected to slow to +1.5% annualized.

UK CPI also increased more than expected, reinforcing the trend that progress on inflation seems to have stalled since Apr 2024. Goods prices were higher in the month and provided a smaller deflationary offset over the year, while services inflation remained elevated at +5%. This may support the BoE’s “gradual approach” to removing policy restraint.

The Euro area core CPI for Oct was confirmed at +2.7% – still above target, but slowly moving lower. The ECB will also need to balance the stronger wage data for Q3 against a backdrop of weakening manufacturing and services conditions. The Nov flash PMI for the Euro area indicated a marked shift back into contraction in output midway through Q4. Larger declines in activity were recorded in France and Germany, with the PMIs reflecting elevated uncertainty regarding both domestic and international political headwinds.

Japan’s inflation rates were little changed, however, there was a notable rebound in monthly CPI of +0.6%. The important core CPI ex fresh food and energy increased to +2.3% in Oct. In a speech at the start of the week, BoJ Governor Ueda was cautious in providing guidance for the next policy move. At a speech later in the week, he repeated this point, noting that there is still a month to go before the next meeting. He did, however, reiterate that at the next meeting the BoJ “will “seriously” assess the impact of foreign exchange rates on inflation and the economy” (source; Bloomberg).

Finally, the RBA Minutes had a few interesting points. The Board is not seeing the conditions needed to begin rate cuts, despite some weakness in private consumption growth. Inflation is still too high, and the RBA noted that recent weakness in the labour market may be reversing. The Board “would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable”. This gained attention, suggesting that the earliest rate cut is now potentially out to May 2025 (assuming no negative unemployment or growth shock).

Outlook for the week ahead: US Thanksgiving holiday, US PCE inflation, FOMC minutes, and the RBNZ monetary policy meeting.

Even though this will be a shortened week, important central bank, inflation, and growth data will be released this week.

In the US, the focus will be on a shortened holiday week, the Fed-preferred PCE inflation for Oct, spending and income for Oct, durable goods orders for Oct, and the FOMC minutes.

Note the shift in the timing of US releases due to the shortened holiday week.

The US PCE inflation for Oct is expected to remain firmer. Headline PCE inflation is expected to increase to +2.3% in Oct, from +2.1% in Sep. This would be still in line with the latest Fed projection for year-end. The monthly headline rate is expected to stay at +0.2%. However, the core PCE rate is expected to increase to +2.8%, above the Fed’s latest projection of +2.6% for year-end. This would mark the highest level of core PCE inflation in five months – which has stalled between +2.6% and +2.7% for the last five months. Additionally, the monthly core PCE rate is expected to increase by + 0.3%.

Personal income for Oct is expected to be unchanged at +0.3% growth while personal spending growth is expected to slow to +0.4% in Oct from +0.5% in Sep.

Durable goods orders are expected to increase by +0.1% in Oct after falling by -0.8% in Sep.

The second estimate of US Q2 GDP growth is expected to be confirmed at +2.8%.

The latest FOMC meeting minutes will be released this week. At the last meeting the FOMC cut the FFR by 25bps, continuing to recalibrate it policy settings. The Committee shifted its language to reflect that it had gained confidence that inflation was on a sustainable path to 2%, but was not yet calling a victory on inflation.

Outside of the US, the RBNZ will meet for the last time this year and is expected to lower its policy rate by 50bps. The next RBNZ meeting will be on 19 Feb 2025.

The AUS monthly CPI series (goods-centric) is expected to increase to +2.3% in Oct from +2.1% in Sep. RBA Governor Bullock will speak at the CEDA conference this week and is expected to elaborate on some of the details released in the minutes last week. The next RBA meeting will be on 9-10 Dec.

Finally, the Euro area prelim CPI for Nov will be released this week, along with many of the country-level prelim CPI reports. Headline Euro area CPI in Nov is expected to increase to +2.4% from +2% in Oct, while core CPI is expected to be little changed at +2.7%.

This week, the US Treasury will auction and settle approx. $814bn in ST Bills, Notes, Bonds, TIPS, and FRNs raising approx. $205bn in new money. This is a relatively large week for treasury auctions.

QT this week: Approx $28bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $7.7bn on Notes & Bonds will mature on the Fed balance sheet and will be redeemed.