- U.S. inflation expected to jump in MarchÂ
- Final-April U.S. consumer sentiment index expected to be revised higherÂ
- Eurozone GDP expected to show a double-dip recession
U.S. inflation expected to jump in March — The consensus is for today’s March PCE deflator to rise by +0.5% m/m and +2.3% y/y, strengthening from Feb’s report of +0.2% and +1.6%, respectively. Today’s March core PCE deflator is expected to rise by +0.3% m/m and +1.8% y/y, strengthening from Feb’s report of +0.1% m/m and +1.4% y/y. The PCE deflator is the Fed’s preferred inflation measure.
The rise in the year-on-year inflation statistics in March is partly due to the low year-earlier base that was caused by the pandemic shutdowns in early 2020. The base effect is much larger for the headline inflation figures than the core figures because of last year’s plunge in oil and gasoline prices during the pandemic shutdowns.
However, inflation has recently been on the rise, even aside from the year-earlier base effect. This can be seen in the 3-month annualized inflation figures.
On a 3-month annualized basis, the PCE headline deflator in February rose by +3.8%, while the core deflator rose by +2.5%. Those 3-month figures are both well above the Fed’s +2.0% inflation target. Today’s expected reports would leave the headline deflator at +4.2% and the core deflator at +2.5% on a 3-month annualized basis.
The CPI report for March has already been released. The March CPI rose by +2.6% y/y, and the core CPI rose by +1.6% y/y, up from Feb’s report of +1.7% and +1.3%, respectively. On a 3-month annualized basis, the March CPI was up by a hefty +5.0% and the core CPI was up +1.9%.
The Fed has been telling the markets for weeks that it believes the current surge in the inflation statistics is “transitory” and will not prompt a Fed rate hike. The Fed believes the higher inflation statistics are due to the base effect and temporary bottlenecks. The Fed believes that the overall global disinflationary trend remains in effect and will re-emerge once the pandemic is over and the global economy normalizes.
However, the fact remains that the Fed is following a new inflation policy of intentionally pushing inflation above 2% so that inflation on a longer-term basis averages out near the Fed’s +2% inflation target. But there is no guarantee that inflation will fall back below 2% once it has risen above 2%. The bond market is therefore somewhat nervous about the Fed’s new approach to inflation targeting.
In fact, the markets currently believe that inflation over the next ten years will average well above the Fed’s +2.0% inflation target. The 10-year breakeven inflation expectations rate on Thursday jumped to a new 8-year high of 2.46% and finished the day at 2.43%. The breakeven rate measures the difference between the nominal 10-year T-note yield and the 10-year TIPS yield, with that difference being inflation expectations.
Final-April U.S. consumer sentiment index expected to be revised higher — The consensus is for today’s final-April University of Michigan U.S. consumer sentiment index to show an increase of +1.0 to 87.5, which would leave the index up by +2.6 points from March rather than the +1.6 point increase seen in the preliminary report.
The Conference Board earlier this week reported that its U.S. April consumer confidence index rose sharply by +12.7 points to a 14-month high of 121.7.
U.S. consumer confidence is strengthening as the pandemic fades and the economy soars. Consumer confidence also received a boost after consumers received their $1,400 stimulus checks in March and April, adding to the $600 stimulus checks they received in January and February.
The improving labor market is also having a big impact on boosting consumer confidence since there are fewer unemployed persons, and since people who have a job can be more confident they will be able to keep their job. Payroll jobs have risen sharply by an average of +692,000 per month in the first three months of this year.
Eurozone GDP expected to show a double-dip recession — The consensus is for today’s Eurozone Q1 GDP to show a decline of -0.8% q/q and -2.0% y/y, adding to Q4’s decline of -0.7% q/q and -4.9% y/y.
Today’s expected Q1 decline of -0.8% q/q would combine with Q4’s decline of -0.7% q/q to meet the technical definition of a recession with back-to-back GDP declines. The Eurozone would thus be back in a recession for the second time in just over a year. The Eurozone GDP plunged by -3.8% q/q in Q1-2020 and -11.6% q/q in Q2-2020, before recovering by +12.5% q/q in Q3-2020.
The Eurozone economy fell back into a recession in Q4 and Q1 because of the resurgence of the pandemic and the need to institute new lockdowns. However, the Eurozone GDP outlook improves as the year moves ahead. The consensus is for Eurozone GDP growth of +1.7% q/q in Q2, +2.1% in Q3, and +1.3% in Q4.
For calendar-year 2021, Eurozone GDP is expected to show an increase of +4.1%, although that would not be enough to offset the -6.6% plunge seen in 2020.
