Markets fear Covid cases might be starting a new wave
U.S. deflator expected steady in February but will start rising in March
Final-March U.S. consumer sentiment expected to be revised higherMarkets fear Covid cases might be starting a new wave — The markets were a bit startled by the news that the number of new U.S. Covid cases on Wednesday rose to a new 6-week high of 89,008, according to Bloomberg data. The 7-day average of new daily Covid cases rose to 56,695 on Wednesday, up from the 5-1/2 month low of 51,820 posted on March 14.
The week-on-week percentage change in the 7-day average of daily Covid cases turned positive about a week ago and jumped to +9.5% w/w on Wednesday. That illustrates how the pandemic is gaining some upside momentum.
Dr. Fauci, in recent weeks, has been warning that Covid cases could see a resurgence due to the higher transmissibility of Covid variants and the fact that many areas are letting down their guard.
The vaccination numbers have risen sharply in recent weeks, but the fact remains that upwards of 45% of the U.S. population, especially younger people, have no immunity to Covid from vaccinations or antibodies sparked by a recovery from the disease.
There are still plenty of people to keep the pandemic alive, at least for the next few months. Even then, there will be some percentage of the U.S. population who will refuse to get vaccinated, leaving a pool of people to keep the Covid going at some level.
The Covid pandemic has seen a resurgence in Europe where vaccinations have been slow. European countries have been forced to extend their lockdowns. Germany on Monday extended its lockdown until April 18. German Chancellor Merkel on Tuesday said that Germany is “in a very, very serious situation,†with Covid “case numbers rising exponentially and intensive-care beds filling up again.”
U.S. deflator expected steady in February but will start rising in March — The consensus is for today’s Feb PCE deflator to rise slightly to +1.6% y/y from +1.5% in January. Meanwhile, the Jan core PCE core deflator is expected to be unchanged from January’s +1.5% y/y. While the deflator is expected to be steady in February, the inflation figures will start rising in March when the year-earlier based drops sharply when the pandemic started.
Fed Chair Powell on Tuesday delivered some soothing inflation comments in his CARES Act testimony. Mr. Powell admitted that inflation will move higher this year, saying “We do expect that inflation will move up over the course of this year.” His reasons for the expected inflation rise include a low year-earlier base, pent-up demand, and supply-chain bottlenecks.
However, Mr. Powell went on to say, “Our best view is that the effect on inflation will be neither particularly large nor persistent.” He added, “We have been living in a world of strong disinflationary pressures — around the world really — for a quarter of a century. We don’t think a one-time surge in spending leading to temporary price increases would disrupt that.”
In last week’s Summary of Economic Projections, the FOMC forecasted that PCE inflation will rise to +2.4% by late this year, but then ease to +2.0% by the end of 2022, right at the Fed’s target. The FOMC is forecasting that core PCE inflation will rise to +2.2% late this year and then ease to +2.0% by the end of 2022.
Despite Mr. Powell’s soothing outlook, the markets are discounting above-target inflation over the next ten years. The 10-year breakeven inflation rate is currently at 2.32%, which is well above the Fed’s +2.0% inflation target and just mildly below the 7-3/4 year high of 2.34% posted in mid-March.
The markets are worried about higher inflation since the Fed has already said that it wants inflation to move above 2% for some period of time so that inflation starts averaging near its target of 2%. Also, the markets are worried about a very hot economy over the next few months as the latest $1.9 trillion pandemic aid package hits the street and as the pandemic fades.
GDP growth is expected to kick into the very high gear of +6.9% in Q2 and +7.0% in Q3, producing an overall 2020 GDP growth rate of 5.7%. That would be the strongest U.S. GDP growth rate in 38 years, i.e., since 1984.
Final-March U.S. consumer sentiment expected to be revised higher — The consensus is for today’s final-March University of Michigan U.S. consumer sentiment index to be revised higher by +0.6 to 83.6, which would leave the index up by a hefty +6.8 points from February rather than the preliminary increase of +6.2 points.
U.S. consumer sentiment showed a strong jump in March as Covid infection rates dropped sharply and $1400 stimulus checks were on the way. The $1.9 trillion pandemic aid was signed into law on March 11, and the checks have since been landing in Americans’ bank accounts.
The latest batch of stimulus checks will push retail sales sharply higher in March and April. In January, when the Americans received $600 stimulus checks from the December pandemic aid bill, retail sales soared by +7.6% m/m and +9.5% y/y. Considering that this month’s stimulus checks are more than twice as large, U.S. retailers are likely to see impressive sales figures in the coming weeks.