- Weekly market focus on Fed and heavy slate of U.S. economic reports
- Trump trade policy
- Dutch election on Wednesday will be a bellwether ahead of French election
- U.S. markets
Weekly market focus on Fed and heavy slate of U.S. economic reports — The U.S. markets this week will focus mainly on the Tue-Wed FOMC meeting. A 25 bp rate hike this week is a lock with the market mainly keying on whether FOMC members raise their forecasts for future rate hikes in the Fed dots. Last Friday’s Feb unemployment report gave an all-clear signal for this week’s 25 bp rate hike since payrolls rose by +235,000 and average hourly earnings rose to +2.8% y/y. The Feb unemployment rate fell by -0.1 point to 4.7%, which was just +0.1 point above the 9-3/4 year low of 4.6% posted in Nov 2016.
This week’s U.S. economic calendar is very busy. Key consumer reports this week include Wednesday’s Feb retail sales report (expected weak at +0.1% headline and ex-autos) and Friday’s preliminary-March U.S. consumer sentiment index (expected +0.7 after Feb’s -2.2 point drop). U.S. inflation data this week is expected to show some fresh upward pressure with the Feb PPI rising to +1.9% y/y from Jan’s +1.6% and the Fed core PPI rising to +1.5% y/y from Jan’s +1.2%. The Feb CPI is expected to rise to +2.7% y/y from Jan’s +2.5%, but the Feb core CPI is expected to ease slightly to +2.2% y/y from Jan’s +2.3%. Housing data is expected to be steady to slightly better with Wednesday’s March NAHB housing index expected unchanged at 65, but with Thursday’s Feb housing starts expected to show a +1.1% increase after Jan’s -2.6% drop.
The U.S. debt ceiling suspension expires on Wednesday, which means the Treasury will have to start using emergency measures to avoid exceeding the new ceiling. However, Congress has until late summer or early autumn before there will be a threat of a Treasury default.
Trump trade policy — The Trump administration’s trade stance will be a big focus this week with President Trump meeting with German Chancellor Merkel at the White House on Tuesday and with the G-20 meeting of finance ministers and central bankers on Friday-Saturday in Baden-Baden, Germany. The markets are still waiting to see how far the Trump administration will go in pursuing its ideas on “America first” and “economic nationalism.” According to reports in the German press, Ms. Merkel on Tuesday will warn President Trump that Europe may retaliate if the U.S. implements the 20% import tax as part of the border adjustment tax proposal.
The markets will continue to closely watch the Republicans’ Obamacare repeal-and-replace effort for its impact on the health care industry and federal budget, and also because Congress needs to get Obamacare done before it can move on to corporate tax reform. The Congressional Budget Office could release its budget scoring on the Obamacare repeal-and-replace plan as early as today, which is likely to have a fairly big impact on whether House Speaker Ryan’s Obamacare proposal can make it through Congress intact.
Dutch election on Wednesday will be a bellwether ahead of French election — The global financial markets will be closely watching Wednesday’s Dutch national election as a bellwether for how populism is faring among voters in Europe. The markets will be watching to see how many parliamentary seats are won by the rabidly anti-Muslim and anti-EU Freedom Party (PVV) led by Geert Wilders. Support for the Freedom Party has dropped fairly sharply in the past several weeks and the ruling Liberals have gained support with the two parties now running neck-and-neck. Even if the Freedom Party gets the most seats in parliament, Mr. Wilders will not be able to form a coalition government because all the other Dutch parties have said they would refuse to enter a coalition with Mr. Wilders. Still, the Dutch election is being closely watched for clues on how National Front leader Marine Le Pen may fare in the upcoming French presidential election.
U.S. markets — The markets this week will continue to closely watch oil prices after April WTI crude oil prices last week plunged by -9.08%. Last Wednesday’s weekly EIA report showed a big jump in U.S. crude oil inventories and a +0.6% w/w increase in U.S. oil production to a 1-year high, which highlighted that U.S. oil producers are making it nearly impossible for OPEC’s production agreement to erase the world’s massive oil supply glut.
Last week’s plunge in oil prices hurt the broad U.S. stock market indexes by undercutting energy stocks and by threatening to produce a new recession in the U.S. oil industry that would have negative multiplier effects for the U.S. economy as a whole. On the more beneficial side, the sharp drop in U.S. oil prices means lower inflation and reduced pressure on the Fed to raise interest rates.
The S&P 500 index last week ran into some mild long liquidation pressure due to the Fed’s hawkish stance and the sharp sell-off in oil prices. Optimism about the stock market remains strong, but stocks this week could run into some additional downside pressure if the Fed dots are more hawkish than the last meeting or if the Trump administration this week raises concerns about protectionism.
The 10-year T-note yield last Friday edged to a new 2-1/2 month high of 2.62%, which was just 2 bp below the 2-1/2 year high of 2.64% posted in mid-December. The 10-year T-note yield has moved sharply higher by +25 bp in the past two weeks mainly because of the more hawkish view of Fed policy. The 10-year T-note yield could move even higher this week if the Fed dots are more hawkish.
The dollar index in the past five weeks has rallied fairly steadily on ramped-up expectations for Fed rate hikes and on increased confidence about the U.S. economy. However, the dollar index fell back last Friday because of a rally in the EUR/USD on a report that ECB members at their meeting last Thursday discussed whether it would be possible to raise interest rates before ending their QE program.
