Leading indicators like PMIs and housing are weak, signalling a recession is potentially on the horizon in the US.
With US inflation coming in higher than expected this week, investors will be looking for clues in the economic data and central bank minutes which will be released in the coming days. This should help guide the market to the potential reaction function of policy makers and also help understand the trajectory of the economy.
Key Takeaways
- Next week in the US, manufacturing and services PMIs, GDP, Jobless claims and new home sales will help paint a picture on the strength of the economy.
- The minutes from the last FOMC meeting will be released along with their preferred measure of inflation the PCE, which should provide some guidance on whether policy will be higher and longer than the market has been anticipating.
- In Europe, German PMIs, CPI, GDP and the ZEW will be closely monitored.
- Domestically, minutes from the RBA meeting, the Westpac Leading Index and wage price index will be released.
Inflation in the US was slightly hotter than anticipated, leading some market participants to wonder if inflation will remain more sticky than many have suggested. This will have implications on policy rates as it may cause central banks to remain more hawkish than the markets have been anticipating. One of the reasons the Federal Reserve can remain hawkish and continue tightening is that so far the economy has proved to be robust and employment remains strong.
Next week the US will release its GDP figures as well as the jobs report, which should give insight into the strength of the US economy, either validating that higher rates can be tolerated or whether activity is starting to slow under the cumulative effect of rate rises. To understand where the economy might be a few months from now, leading indicators such as the S&P Purchasing Managers Index (PMI) and new homes sales will also be of interest.
THE LIST
Currently the leading indicators like PMIs and Housing are weak, signalling a recession is potentially on the horizon. This contrasts to the strong coincident indicators such as GDP. However, monetary policy works with long and variable lags, so it is not uncommon for a strong economy to roll over into recession in the face of aggressive rate hikes. Therefore, minutes from the FOMC meeting will be of interest to see if policy makers are leaning towards taking their foot off the break and adopting the wait and see approach, or whether concerns over inflation becoming entrenched will lead to rates being higher for longer, potentially leading to a policy mistake.
Similar economic data will be released in the Eurozone, in particular German inflation and GDP, along with leading indicators such as PMIs and the ZEW economic sentiment index. While PMIs remain weak, the ZEW has been very strong, pointing to a better than expected outlook for the Eurozone. This will likely continue to place pressure on the ECB to raise rates, but is a far more sanguine economic environment than what was anticipated back in 2022.
Closer to home, the minutes from the RBA meeting will be released. While Australia lags the US in terms of rate hikes, it is likely to have a greater impact on the economy here. Unlike the US which is mostly a fixed rate market, Australia’s abundance of variable rate mortgages means rate rises here have a far faster transmission effect. Markets will be keen to digest the Westpac Leading Index and wage price data to see any signs that the RBA may let up.
Sebastian Mullins is Deputy Head of Multi-Asset, Australia. Schroders.
