Powell testimony could marginally change expectations for Fed policy
Feb U.S. consumer confidence expected to show continued strength
U.S. home prices expected to show continued strength
Chinese PMIs expected to show small declines
Powell testimony could marginally change expectations for Fed policy — The markets are eagerly waiting to hear from Fed Chair Powell as he testifies today before the House Financial Services Committee and on Thursday before the Senate Banking Committee in the semi-annual monetary policy hearings. The markets have yet to hear much from Mr. Powell in his new role as Fed Chair and are eager to gauge his tone.
The consensus is for Mr. Powell to follow closely in the footsteps of former Fed Chair Yellen and voice support for a further gradual rise in interest rates. However, Mr. Powell might want to use his first big appearance on the world stage as the new Fed Chair to stake out his own twist on monetary policy. The markets continue to fear that Mr. Powell might take a more hawkish approach to monetary policy than Ms. Yellen did since he faces a more hawkish macroeconomic situation and since he presides over a more hawkish set of voting regional Fed presidents than did Ms. Yellen in 2017.
The markets are discounting a total of +69 bp worth of Fed rate hikes this year, which equates to 2.8 rate hikes. That is fairly close to the Fed-dot forecast for 3 rate hikes this year. For 2019, the market is currently discounting a further 37.5 bp worth of rate hikes (1.5 rate hikes), which less than the Fed-dot forecast for 56 bp of rate hikes in 2019 (2.2 rate hikes).
There has been substantial market commentary about whether the Fed might raise rates four times this year to address both the strong economy and the pick-up in inflation. One argument in favor of four rate hikes is that there are four FOMC meetings this year that have press conferences (i.e., March 20-21, June 12-13, Sep 25-26, Dec 18-19). If the Fed raises interest rates only three times, then it will have to raise interest rates at one or more meetings where Fed Chair Powell will not have the opportunity to explain the move in a post-meeting press conference.
We believe that the Fed will go ahead with three rate hikes this year regardless of whether there are intervening economic hiccups or stock market volatility. We believe the Fed is chomping at the bit to at least push the funds rate above the 2.0% inflation target into positive real territory. Three rate hikes this year would put the funds rate at 2.00-2.25%, slightly above the Fed’s inflation target. Once the funds rate is in positive real territory, then the Fed can slow its rate hikes to try to ensure that it doesn’t overdo its rate hikes and cause either a stock market crash or a recession.
Feb U.S. consumer confidence expected to show continued strength — The market consensus is for today’s Feb Conference Board U.S. consumer confidence index to show a +1.0 point increase to 126.4, adding to Jan’s +2.3 increase to 125.4. For its part, the University of Michigan has already reported that its consumer sentiment in early-Feb rose by +4.2 points to 99.9, which was a positive indicator for today’s Conference Board report. The Conference Board’s U.S. consumer confidence index is only -3.2 points below the 17-1/4 year high of 128.6 posted in Nov 2017.
Positive factors for consumer confidence include (1) larger after-tax paychecks for many consumers after the Jan 1 tax cut, (2) the recovery in stock prices after the early-Feb correction, (3) steadily rising home prices, which are boosting household wealth, and (4) the strong labor market and upward pressure on wages. Negative factors include (1) Washington political uncertainty, (2) rising interest rates, and (3) the recent downward correction in stock prices.
U.S. home prices expected to show continued strength — U.S. home prices are expected to show continued strength due to strong demand and tight supplies. The consensus is for today’s FHFA Dec house price index to show a +0.4% m/m increase, matching November’s increase. Meanwhile, the consensus is for today’s Dec S&P CoreLogic composite-20 home price index to show a strong +0.6% m/m increase, adding to November’s +0.75% increase.
The FHFA index has risen sharply by +6.5% y/y in the past year and is up by +43% from the housing-bust trough. The S&P CoreLogic Composite-20 index has risen by a similar +6.4% y/y and is up by a total of +48% from the housing bust low. Housing prices are likely to continue to rise in coming months due to strong demand and tight supplies, but might start to run into some headwinds as mortgage rates rise. The 30-year mortgage rate has risen by +60 bp since late 2017 to post a new 4-year high of 4.40%.
Durable goods orders ex-transportation expected to show continued strength — The consensus is for today’s Jan durable goods orders to fall -2.0% after Dec’s increase of +2.8%. Excluding transportation orders, durable goods orders are expecting to rise +0.5%, adding to Dec’s +0.7% increase. Durable goods orders ex-transportation showed a very strong rise of +8.4% y/y in December due to strong U.S. and global growth. Durable goods orders should get a new boost in early 2018 from the new tax law, which allows the full expensing of equipment purchases for the next five years.
Chinese PMIs expected to show small declines — The market consensus is for tonight’s (ET time) Chinese PMI indexes from the National Bureau of Statistics to show small declines. The consensus is for the China Feb manufacturing PMI to show a -0.1 point decline to 51.2, adding to Jan’s decline of -0.3 to 51.3. Meanwhile, the consensus is for today’s Feb non-manufacturing PMI to show a -0.3 decline to 55.0, reversing Jan’s +0.3 point increase to 55.3. Despite the expected small declines, the Chinese economy remains in generally favorable shape and business confidence is stable.