- Fed’s preferred inflation measure expected to edge above 2.0%
- Feb personal spending expected to show a modest gain
- Final-Feb U.S. consumer sentiment expected to be left unrevised
- Chicago PMI expected to fall back from 2-year high
Fed’s preferred inflation measure expected to edge above 2.0% — The market is expecting today’s Feb PCE deflator to edge higher to +2.1% y/y from Jan’s +1.9%. The expected report of +2.1% y/y would be a 4-3/4 year high and would be the first time that the deflator has moved above the Fed’s +2.0% inflation target since April 2012. However, today’s Feb core PCE report is expected to be tamer and be unchanged from Jan’s level +1.7% y/y.
The markets will not be particularly worried if the PCE deflator in February moves above the Fed’s +2.0% inflation measure because it is likely to move back down in March thanks to the sharp drop in oil prices in March. The fact that the core PCE deflator is expected to remain unchanged at +1.7% y/y in February illustrates that the underlying outlook for inflation at this point is still steady. However, there could be increased pressure on inflation as the year wears on if wages increase and if the economy improves as the market expects.
Market-based expectations for inflation have been moving sideways over the past two months after rising sharply right after the election. The 10-year breakeven inflation expectations rate, for example, moved sharply higher by +35 bp from 1.73% before the election to reach a peak of 2.08% in late January. That sharp rise in inflation expectations was due to the combination of the Republican agenda and higher oil prices from the Nov 30 OPEC production-cut agreement.
However, the 10-year breakeven rate in early February then fell back to the 2.00% area and has since moved sideways. The breakeven rate is currently at 1.98%, up by +25 bp from the pre-election and pre-OPEC level. The 5-year 5-year-forward breakeven rate, which essentially measures inflation expectations on a 5-10 year time frame, is currently a bit higher at 2.10%, up by +20 bp from 1.90% before the election.
Feb personal spending expected to show a modest gain — The market is expecting today’s Feb personal spending report to show a modest increase of +0.2%, thus matching January’s +0.2% increase. The better news, however, is that personal income is expected to outstrip spending in February, thus giving consumers some increased spending firepower. The consensus is for today’s Feb personal income report to show an increase of +0.4%, thus matching Jan’s gain of +0.4%.
Lackluster consumer spending so far in Q1 has led the Atlanta Fed’s GDPNow to forecast Q1 GDP at only +1.0% (+1.8% ex-inventories). The weak forecast is due in part to an expected contribution to GDP from personal consumption of only 1.0 percentage points versus the 2.0 point contribution seen in the second half of 2016.
Final-Feb U.S. consumer sentiment expected to be left unrevised — The market is expecting today’s final-March University of Michigan U.S. consumer sentiment index to be left unrevised from the preliminary-March figure of 97.6. That would leave the index up by +1.3 points from April’s 96.3.
Today’s sentiment report could be a bit stronger than expected given that the Conference Board this past Tuesday reported that its U.S. consumer confidence for February rose sharply by +9.5 points to a new 16-1/3 year high of 125.6.
U.S. consumer sentiment remains very strong due to the firm labor market, recent record highs in the stock market, steadily-rising home prices, low gasoline prices, and expectations for personal tax cuts. However, there are some potential headwinds for consumer confidence such as the Fed’s multi-year rate-hike regime, rising mortgage rates, and room for some disappointment if the Republican agenda ends up falling short of expectations.
Chicago PMI expected to fall back from 2-year high — The market is expecting today’s March Chicago PMI to show a -0.5 decline to 56.9. That would be only a minor decline after February’s sharp +7.1 point increase to a 2-year high of 57.4.
On the manufacturing confidence front, the market is mainly looking ahead to Monday’s ISM manufacturing index report. That report is expected to show a -0.9 point drop to 56.8. The ISM index has risen by a total of +5.7 points since the election to February’s 2-1/2 year high of 57.7.
The ISM manufacturing new orders sub-index has been even stronger, suggesting that the orders pipeline is filling up. The ISM new orders sub-index since the election has soared by +11.0 points to post a new 7-1/2 year high of 65.1 in February.