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Friday, May 26, 2023

Macro (Re)view (26/5) | Powering on

Although a resolution to the US debt ceiling remains elusive, robust data and a Fed remaining open to hiking rates further have continued to push bond yields higher. US dollar strength remains a key factor in markets. Outperformance in US equity markets was notable this week as the tech sector surged. 


The minutes of the FOMC's May meeting highlighted uncertainty around whether it had hiked rates sufficiently to put inflation on the glide path back to the 2% target. That came as the key core PCE deflator printed above expectations in April at 0.4%m/m and 4.7%yr. Meanwhile, real consumption was continuing to expand at a solid pace (0.5%m/m/2.3%yr). 


The FOMC acknowledges that the full effects of its hiking cycle remain in the pipeline and that the regional bank failures imply an additional tightening impulse in credit conditions; however, a tight labour market and high inflation (with upside risks to the outlook) remain in focus. FOMC members come to differing interpretations on the balance of these considerations: "some participants" support more tightening but "several" members are of the view that more hikes may not be needed. In a speech, Fed Governor Waller said it was possible that the data (and other circumstances) could make the case to "skip" hiking rates in June; however, he does not believe that the FOMC has reached its peak rate.     

UK inflation surprised to the upside in April, with markets now pricing four additional rate hikes from the BoE to take the peak rate to 5.5% (from 4.75% previously). Headline inflation declined from 10.1% to 8.7% (vs 8.2% exp) - the fall mainly reflecting the unwind from surging energy prices a year ago - but it was the rise in the core rate from 6.2% to 6.8% (vs 6.2% exp) that came as a shock. A lift in services inflation to 6.9% suggests the persistent inflationary risks the BoE is hiking rates to guard against will require more attention. To this point, BoE Governor Bailey reiterated to the Treasury Committee this week that wage and price settings remain the key factors shaping the inflation outlook. 


The euro area composite PMI slowed to 53.3 in May, a reading consistent with modest growth as a resilient services sector (55.9) continues to support the economy. This widened the divergence to the manufacturing sector (44.6) where both output and new orders in decline. Inflation dynamics also vary significantly, with labour costs keeping price pressures elevated for services, while falling energy prices and improved supply chains are weakening inflation in manufacturing.

Source: S&P Global 

Headwinds to household spending in Australia saw retail sales stall in April (reviewed here). Despite rapid population growth adding to demand and higher prices, nominal sales have plateaued over recent months. Across the Tasman, the RBNZ hiked rates by 25bps to 5.5% but dialled down its hawkish messaging materially. The Committee signalled that rates have reached their peak and expressed confidence that remaining at this restrictive level will bring inflation back to its 1-3% target range.