“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2% objective over the medium term,” the Federal Reserve said on Wednesday.
In other words, the Fed’s telling us it will keep monetary policy loose and stimulative until we get more confirmation of falling unemployment and moderate price growth.
The Fed’s renewed commitment to data means economists and traders around the world will pay very close attention to Tuesday’s consumer price index report.
Here’s your Monday Scouting Report:
“Patient” gives way to “Reasonably Confident”. The Fed had long been using the word “patient” to characterise its willingness to wait before it begins to hike rates. But in its March FOMC meeting, it dropped that language altogether for this: “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term.”
Economists see this language shift as the Fed saying it will be more data-dependent. And because the Fed downgraded its outlook for GDP growth and inflation growth, the Fed’s statement was interpreted as dovish, meaning that the Fed signaled it would keep monetary policy loose for longer. As a matter of fact, Fed members themselves have reduced their expectation for the pace of rate hikes.
“While Chair Yellen did not provide precise criteria for reasonable confidence, our own core inflation forecast remains below the Committee’s expectation of a sideways move in the remainder of 2015,” Goldman Sachs’ David Mericle said. “As a consequence, we see the risks as skewed toward an even later liftoff than our September baseline”
- Existing Home Sales (Mon): Economists estimate the pace of sales increased to by 2.0% in February to an annualized rate of 4.92 million units. From Bank of America Merrill Lynch: “Existing home sales track closed contracts and therefore impacted by the weather with a lag. Harsh winter weather will delay the search for a property and new signings, but it shouldn’t impact contract closings. After the past several months of contraction, we expect inventory to increase in February as sellers prepare for the spring selling season. The risk is for a notable gain given that levels have been depressed.”
- Consumer Price Index (Tues): Economists estimate CPI climbed 0.2% month-over-month in February, but fell 0.1% year-over-year. Excluding food and energy, core prices are estimated to have increased by 0.1% and 1.7%, respectively. Here’s Credit Suisse: “Gasoline should swing from huge minus to small plus this month. February nationwide average gasoline prices increased 10% versus January (albeit from a very depressed base), and seasonal factors expect a 2.8% increase.”
- Markit US Manufacturing PMI (Tues): Economists estimate this manufacturing index slipped to 54.6 in March from 55.1 in February. From UBS: “The Markit manufacturing PMI and the manufacturing ISM index have suggested ongoing momentum in factory output, diverging from the slowdown reported in the official manufacturing production data … The Markit and ISM indexes are relatively less sensitive to weather than actual output, which may explain some of the deviation. Nevertheless, some pullback appears likely in March, judging from regional surveys reported to date.”
- New Homes Sales (Tues): Economists estimated the pace of sales fell 2.9% in February to an annualized rate of 467,000 units. From Bank of America Merrill Lynch: “Similar to single family housing starts, we think abnormally cold and wet winter weather will restrain activity. The NAHB homebuilder survey has also deteriorated, citing the weather has one explanation. We expect this to be a temporary soft patch and look for growth to return in the spring.”
- Richmond Fed Manufacturing Index (Tues): Economists estimate this regional activity index climbed to 3 in March from 0 in February. From UBS: “Regional surveys are suggesting some slowing in output in late Q1.”
- Durable Goods Orders (Wed): Economists estimate orders climbed by 0.2% in February. Nondefense capital goods orders excluding aircraft is estimated to have climbed by 0.3%. From Nomura: “Excluding transportation, durable goods orders have been weak since late summer, raising concerns about future factory activity. Incoming production data for February have been weak, and the new orders subindexes within manufacturing surveys generally showed declines in February. Moreover, the West Coast port dispute (which ended in late February) and inclement weather probably weighed on activity.”
- Initial Jobless Claims (Thurs): Economists estimate the weekly jobless claims climbed to 290,000 from 291,000 a week ago. From Nomura: “Claims have returned below 300k thus far in March and continue to point to solid improvement in labour market performance.”
- Markit US Services PMI (Thurs): Economists estimate this services index slipped to 57.0 in March from 57.1 in February.
- GDP (Fri): Economists estimate Q4 GDP growth will be revised up to 2.4% from last month’s estimate of 2.2%. Personal consumption expenditures is estimated to have jumped 4.4% from 4.2%. From Barclays: “The Quarterly Services Survey (QSS) suggests an upward revision to healthcare-related services PCE, which, along with an upward revision to December core retail sales, should boost Q4 real consumer spending to 4.7%. Elsewhere, we expect further downward revisions to inventory growth and slightly less of a drag from net trade than previously estimated.”
- U. of Mich. Sentiment (Fri): Economists estimate this index of sentiment climbed to 92.0 in March from 91.2 in February. From Barclays: “Gas prices and financial market volatility have eased since the preliminary survey period, while stock prices have moved higher. All three factors are positive for sentiment and we look for an upward revision in the final monthly reading.”
UBS’s Julian Emanuel thinks Federal Reserve chair Janet Yellen and the Fed have set the stage for more market volatility. But overall, he thinks the big picture looks favourable for stocks.
Here’s Emanuel: “Chair Yellen’s admission that “removing the word patient from the statement doesn’t mean we are going to be impatient” reinforces the idea that the task at hand for the Fed is one where a degree of market uncertainty and flexibility to incoming developments is necessary for normalization to unfold. We expect this uncertainty will continue to underpin equity market volatility, which is trending well in excess of the prior two years. At the same time, the combination of historically low (but rising) interest rates, continued low oil prices, and strength in consumer and corporate confidence reinforces our year end S&P 500 price target of 2,225 but we think it increases the probability that our “upside risk” price of SPX 2,400 could materialise.”
For more insight about the middle market, visit mid-marketpulse.com.
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