As usual, investors are nervous.
The S&P 500 is just 2% below its all-time high. Meanwhile, harsh winter weather continues to distort economic data, which are only providing a murky look at what’s going on in the economy.
Meanwhile, the tension on the Russia-Ukraine border has some saying we’re facing the worst east-west crisis since the Cold War.
Among other things, this week’s schedule will be highlighted by the Federal Reserve’s two-day Federal Open Market Committee (FOMC) meeting. Fed members led by Janet Yellen continue to be under pressure to unwind easy monetary policy as the threat of inflation lingers.
Here’s your Monday Scouting Report:
- Tension On The Russia-Ukraine Border: The Crimea people are expected to vote in favour of the Russian annexation of their land. And the U.S. and E.U. are expected to respond with economic sanctions. But all of this would only be the beginning of the story. “The biggest risk to the current delicate situation would be Russian military intervention beyond Crimea, in Eastern or Southern Ukraine,” warned Citi’s Tina Fordham. “Were this to occur, the Western allies would likely consider broader-based sanctions and a heightened state of NATO military readiness. In Kiev, the capacity of the Ukrainian military has prompted calls for a volunteer National Guard. The presence of far-right groups like the Right Sector, despite their limited popular support, has been cited by Moscow as evidence of “anti-Russian extremism”. The pollster Levada Center has released a survey reporting that 67% of Russians believe radical Ukrainian nationalist groups are behind the current situation, underscoring the divergence of views between Russia and the West, which is supporting the new Ukrainian government.”
Janet Yellen And The Fed Under The Spotlight: In December 2012, the FOMC announced it would employ a 2.5% inflation rate threshold and 6.5% unemployment rate threshold to guide monetary policy. This so-called forward guidance is part of the Fed’s ongoing efforts to be more transparent. But with the unemployment rate tumbling even as many other labour market stats remain weak, economists expect the Fed to make some changes to that forward guidance during this week’s meeting.
“The rapid drop in the unemployment rate towards 6.5% has left the Fed’s quantitative forward guidance at risk for removal in the March 19th FOMC statement,” said Morgan Stanley’s Vincent Reinhart. “Indeed, Fed Chair Yellen has said she is comfortable with moving to qualitative forward guidance, eschewing the 6.5% threshold. Several of her principal supporters, including Lacker, Dudley, Williams, Lockhart, Evans, Bullard and Plosser, have also recently expressed support for this move.”
Goldman Sachs’ Sven Jari Stehn agrees we could see more qualitative guidance. “We see two options for doing so,” said Stehn. “The first would be to retain the 6.5% unemployment threshold and add a qualitative description of the Committee’s policy intentions thereafter. The second option would be to switch entirely to qualitative guidance and drop the 6.5% threshold. Either option is possible in our view.”
- Empire State Manufacturing Survey (Mon): Economists estimate this index of New York area manufacturing increased to 7.00 in March from 4.48 in February. “With snowfall in March closer to normal than February, but temperatures still very frigid, we expect to see only a slight improvement in manufacturing sentiment,” said Nomura economists.
- Industrial Production (Mon): Economists expect production increased by 0.2% in February. “A rebound in auto output is expected to drive IP into shallow positive territory following last month’s 0.3% decline,” said Credit Suisse economists. “Factory hours worked also dropped by less in February (-0.2%) than in January (-0.7%), so it’s possible weather effects will be sequentially less of a factor this month. Weekly utility output figures point to a decline following the January spike.”
- NAHB Housing Market Index (Mon): Economists estimate this homebuilder sentiment index climbed to 50 in March from 46 in February. “Better weather conditions likely allowed for greater buyer traffic, which in turns improves homebuilder expectations,” said Bank of America Merrill Lynch economists. “However, the lack of lots and labour will continue to weigh on sentiment.”
- Housing Starts (Tues): Economists estimate starts climbed 3.5% to an annualized pace of 911,000 in February. “We think poor weather conditions continued to weigh on housing activity in February, limiting the strength of the payback,” said Bank of America Merrill Lynch economists. “Moreover, building permits were weak in January and the NAHB housing index declined in February. Looking forward, we expect a solid gain in activity in the spring season along with a gain in demand.”
- Consumer Price Index (Tues): Economists estimate CPI climbed by 0.1 month-over-month in February and 1.2% year-over-year. Excluding food and energy, economists estimated prices climbed 0.1% and 1.6%, respectively. “Retail gasoline prices rose less than they normally do in February and should be down 1.5% in seasonally adjusted terms, but higher natural gas and coal prices will likely see some feed through into another elevated reading for utility prices, leaving energy prices flat overall,” said Morgan Stanley’s Ted Wieseman. “Meanwhile, slowing food inflation has been a restraint on headline CPI for the past several years, with a drop from a high of +4.7% year/year in September 2011 to only +1.1% in January, but recently soaring agricultural commodity prices may start to gradually shift that back in the other direction in coming months … Because BLS attempts to back out utilities included in rent checks when computing rent and OER inflation, a surge in utility costs tends to depress shelter inflation a bit in the short run. Industry indications also point to increased discounting of apparel and motor vehicles in February as bad weather depressed sales.”
- FOMC Meeting Announcement (Wed): The Federal Reserve will conclude its FOMC meeting at 2:00 p.m. ET. Economists expect no change in interest rates, but it expects the Fed will taper its monthly purchases of Treasury securities to $US30 billion from $US35 billion and mortgage-backed securities to $US25 billion from $US30 billion.
- Initial Jobless Claims (Thurs): Economists estimate initial claims climbed to 320,000 from 315,000 the week prior. “Initial claims probably rose after what we posit was a winter weather induced decline in the previous week,” said Citi’s Peter D’Antonio. “A snow storm swept through the Midwest and South during the week ended March 8, which probably dampened filings. So, there may be some payback during the week ended March 15. Despite the increase, the four-week moving average continued to decline during the March BLS employment survey week, and was almost 10,000 below the level of February’s. We would not be surprised by strong payroll prints in March and April after several months of weather-depressed readings.”
- Philadelphia Fed Survey (Thurs): Economists estimate this regional business activity index bounced to 4.0 in March from -6.3 in February. “The Philly Fed business survey‟s headline index fell into negative territory in February for the first time since May of last year,” said Nomura economists. “We attribute the weakness to the overall snowy and cold weather. Adverse weather conditions should weigh less on activity in March.”
- Existing Home Sales (Thurs): Economists estimate existing home sales slipped 0.1% to an annualized pace of 4.62 million in February. “Since existing home sales track closed contracts, they are a function of signed contracts one or two months prior,” said Bank of America Merrill Lynch economists. “The weather has been notably poor during this winter season which should depress existing home sales. We also think inventory will remain lean, however, keeping months supply close to the recent trend of 5 months.”
Earlier this month, Citi U.S. equity strategist Tobias Levkovich offered some guidance on how investors should think about the crisis in Ukraine. From his March 3 note:
“Geopolitical risks are always a concern but direct impact is needed to undermine equities in a significant way. The history of international conflicts having much impact on US equities is very limited and thus a much larger conflict would be needed to have considerable negative impact. The Russian invasion of Afghanistan in the late 1970s, for example, generated a grain embargo from the US that had severe consequences on the American farm economy that took years to unwind and recover from, but the Georgian conflict, the Iraq-Iran War, Kosovo and even the current Syrian civil war have had very marginal impact…”
Investors in U.S. stocks appear to have much less to worry about than investors in Russian stocks.
“[T]he worst case scenario that Russia becomes uninvestible (capital controls, such as in Malaysia in 1998, and even the expropriation of foreign owned assets in Russia) with Russia kicked out of MSCI GEMs cannot be entirely ruled out,” warned UBS’s Geoff Dennis.
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