The banking crisis has complicated matters for the Fed, which was decidedly tilting in favor of a 25 basis point hike in the fed funds rate or higher at the March meeting.
Inflation Easing: Most of the economic data points released in the past week vouched for the resilience of the economy. Inflation data, both consumer and producer prices, continued along a downward trajectory.
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The annual CPI fell to the lowest since mid-2021. With housing costs, which accounted for over 70% of the index, expected to drop by the year’s end, as more multi-family units come to market, inflation will likely ease further going forward, LPL economist Jeffrey Roach said. Producer prices unexpectedly fell in February.
The declining trend was confirmed by the University of Michigan’s preliminary consumer sentiment survey for March, which showed one-year inflation expectations falling from 4.1% to 3.8%.
Among the other economic data, retail sales fell in line with expectations and jobless claims declined by more than expected. The first glimpse of manufacturing activity for March showed disappointing results, with both Empire State and the Philadelphia Fed’s surveys showing continued contraction.
Despite the ongoing banking turmoil, the European Central Bank’s Governing Council that met last week raised rates by 50 basis points.
Look Ahead: The March 20-21 meeting of the Federal Open Market Committee, or FOMC, will likely headline the Main Street events of the week. A pause could signal to the people that the Fed fears more ramifications and this in turn can cause nervousness among market participants, former Treasury Secretary Larry Summers said.
The CME FedWatch tool shows that the futures are pricing in a 49.5% probability for a 25 basis-point increase in the fed funds rate and a 50% probability of a pause.
Rating agency Moody’s looks forward to a pause in March but a quarter percentage point increment each in May and June. The firm attributed its expectation for a March pause to the recent spate of bank failures, which has served to roil the financial markets.
So much water has flown under the bridge since the Fed met in early February. An unexpected crisis landed upon the economy and the market in the form of banking collapses and the contagion risk fears they sparked.
After Credit Suisse AG CS was sold in a fire-sale to domestic peer UBS Group Inc. UBS amid the former’s travails, five global central banks, including the Fed, announced a coordinated action to increase the funding available through the dollar swap-line arrangements. It remains to be seen if the action would allow the Fed leeway to hike rates yet again.
The FOMC decision is due following the conclusion of the two-day meeting on Wednesday, at 2 p.m. EDT. The central bank will also release the latest economic forecasts and the dot-plot curve, which incorporates the interest rate projections of the Fed officials.
Chairman Jerome Powell will host a press briefing at 2:30 p.m. EDT to shed further light on the March policy decision and the outlook.
Home, Sweet Home: The unfolding week’s calendar also has a few housing market readings. On Tuesday, the National Association Of Realtors is scheduled to release the existing home sales report for February at 10 a.m. EDT. Sales are expected to rebound by 2% month-over-month growth following a 0.7% drop in January.
The customary mortgage applications volume data for the week ended March 17 is due on Wednesday at 7 a.m. EDT. Mortgage applications volume was higher for a second straight week in the week of March 10, rising 5% compared to the previous week. Year-over-year comparisons show that the metric is bouncing around the bottom, having plunged 74%.
The Commerce Department’s new home sales data for February is due on Thursday at 10 a.m. EDT. Economists, on average, expect a decline in new home sales from 670,000 in January to 648,000 in February.
The Commerce Department will also release the revised building permits data for February at 8 a.m. EDT.
Other Key Data: The durables goods orders report for February is scheduled to be released by the Commerce Department at 8:30 a.m. EDT. Economists expect a 1.2% month-over-month increase in durable goods orders and a 0.2% upside in orders for core durable goods, which exclude the volatile transportation orders.
In January, the rate of the monthly change in durable and core durable orders was at a negative 4.5% and a positive 0.8%, respectively.
S&P Global will release its manufacturing, services and composite purchasing managers’ indices for the U.S. at 9:45 a.m. EDT on Friday. The consensus call for continued contraction in the manufacturing sector, with the corresponding PMI expected to edge up from 47.3 in February to 47.6 in March. The services sector PMI is widely expected to increase from 50.6 to 50.8.
The composite PMI, which takes into account activity levels in both the manufacturing and non-manufacturing sectors, is expected to have dipped below the ‘50’ level, which demarcates expansion and contraction.
The customary jobless claims report due to be reported on Thursday at 8:30 a.m. EDT is expected to show an increase in the number of people filing for unemployment benefits from 192,000 in the week ended March 11 to 199,000 in the week ended March 18.
Treasury Auction: With the yields having pulled back notably recently amid the banking crisis, traders may watch out for the Treasury auctions to gauge the interest in these securities.
Auctions of 3-month and 6-month bills are due on Monday at 11:30 a.m. EDT.
The Treasury will auction 52-week bills on Tuesday at 11:30 a.m. EDT and 20-year bond auction at 1 p.m. EDT.
An auction of 10-year treasury inflation-protected securities, or TIPS, will be held on Thursday at 1 p.m. EDT.
Fed Speeches: The Fed’s blackout period, which began on March 11, ends on Thursday. FOMC member and Chicago Fed President James Bullard is scheduled to speak on Friday at 9:30 a.m. EDT.
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