- FOMC today is expected to leave policy unchanged
- Core CPI expected to be steady but markets are still a little nervous about the recent uptick in the inflation data
- U.S. housing starts expected to show moderate gain
- Manufacturing production expected to edge higher
- EIA report expected to show another increase in U.S. crude oil inventories
FOMC today is expected to leave policy unchanged — The FOMC, after the conclusion of its 2-day policy meeting today, will release its post-meeting policy decision statement, updated macroeconomic forecasts, and new Fed dots with the FOMC members’ federal funds forecasts. Fed Chair Yellen today will also hold a post-meeting press conference.
The market is discounting a near-zero chance for a rate hike announcement today. The markets have just started to settle down from the Jan-Feb stock market sell-off, which was caused by the Chinese turmoil and the plunge in oil prices. The Fed at this point would be well-advised not to rock the boat with a rate hike that would likely spark new strength in the dollar, new stress for China and developing countries, and new concern about the U.S. economy that is currently running on only one cylinder, i.e., consumers.
However, if China settles down, and if oil prices and the U.S. stock market can hold their recent recovery rallies, then the chances ramp up for a Fed rate hike later this year. The federal funds futures market is discounting the chances for a +25 bp rate hike at 22% by the April FOMC meeting, 58% by the June meeting, 68% by the July meeting, 90% by the Sep meeting, and 100% by the Nov meeting.
Core CPI expected to be steady but markets are still a little nervous about the recent uptick in the inflation data — The markets are expecting today’s Feb CPI to ease to +0.9% y/y from Jan’s +1.4% and for the Feb core CPI to remain steady from Jan at +2.2% y/y. The markets are carefully watching the inflation situation after the recent uptick in U.S. inflation statistics and with the rise in inflation expectations caused by the recent rally in crude oil prices. The 10-year breakeven inflation expectations rate has risen sharply by 39 bp to the current level of 1.51% from the 7-year low of 1.12% posted in mid-Feb.
As for the recent rise in the inflation statistics, the CPI in January rose to a 1-1/3 year high of +1.4% y/y and the Jan core CPI rose to a 3-3/4 year high of +2.2% y/y. The Jan PCE deflator, the Fed’s preferred inflation measure, rose to a 1-1/3 year high of +1.3% y/y and the Jan core PCE deflator rose to a 3-1/4 year high of 1.7% y/y. Yesterday’s final-demand PPI report for February showed an increase in the PPI to a 1-year high of unchanged y/y and an increase in the core PPI to a a 1-year high of +1.2% y/y.
The latest core PCE deflator rate of +1.7% is still below the Fed’s +2.0% inflation target, but it has risen fairly quickly from the 4-3/4 year of +1.3% seen during most of 2015, illustrating some upside inflation pressures. If those pressures continue, the Fed will be under pressure to implement its next rate hike sooner rather than later.
U.S. housing starts expected to show moderate gain — The markets are expecting today’s Feb housing starts report to show an increase of +4.6% to 1.150 million, more than recovering the -3.8% decline to 1.099 million seen in January. Meanwhile, the market is expecting today’s Feb building permits report to show a small increase of +0.2% to 1.200 million units after Jan’s report of unchanged at 1.202 million.
U.S. housing starts have tailed off by a total of -9% from the 8-1/4 year high of 1.211 million units posted in June 2015, illustrating a dent in U.S. home building activity. In addition, yesterday’s NAHB housing market index was unchanged at 58, which was -7 points below the 10-year high of 65 posted in Oct 2015. However, home builders are still relatively confident about the home building market due to due to strong home sales, rising home prices, and a relatively tight supply of homes. The markets are hoping for an improvement in home building activity going into spring if the stock market can hold its recent recovery rally and if U.S. GDP in Q1 can improve from Q4’s poor +1.0% report.
Manufacturing production expected to edge higher — The market is expecting today’s Feb industrial production report to show a decline of -0.3%, reversing one-third of January’s +0.9% surge. Isolating the manufacturing sector and excluding the weather’s impact on utility production, today’s Feb manufacturing production report is expected to edge higher by +0.1%, adding to January’s solid gain of +0.5%. There are hopes that the U.S. manufacturing sector is regaining its balance and is turning a bit higher. The ISM manufacturing index rose by +1.5 points in Jan-Feb to 49.5 after bottoming out at a 6-1/2 year low of 48.0 in Dec 2015. The markets were also encouraged by the recent news that Jan durable goods orders ex-transportation rose by +1.7% m/m and that Jan capital spending rose by +3.4%.
EIA report expected to show another increase in U.S. crude oil inventories — The market consensus for today’s weekly EIA report is for a +2.75 million bbl rise in U.S. crude oil inventories, a -2.5 million bbl decline in gasoline inventories, a -1.0 million bbl decline in distillate inventories, and a -0.2 point decline in the refinery utilization rate to 88.9%. U.S. oil inventories remain in a massive glut at +37.3% (142 million bbls) above the 5-year seasonal average. Meanwhile, product inventories are ample with gasoline inventories +9.2% above average and distillate inventories +24.1% above average.
Meanwhile, the markets are expecting today’s EIA report to show a decline in production. So far, U.S. oil production has fallen by only -5.5% from the 43-year high of 9.610 million bpd posted in June 2015 despite the -76% plunge in the number of active U.S. oil rigs. However, production is expected to start falling faster in coming weeks as financial pressure intensifies on oil companies and as the impact is seen from the fact that 152 oil rigs (-28%) have shut down just since the beginning of the year.
