Monday Update: March Rate Hike Seems Likely

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Feb 26, 2018 11:55:22 AM

and tagged In the News

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Monday updateLast week was a slow one for economic data. But this week, we’ll have five major economic reports that will give us a detailed look at both consumers and manufacturing. Let’s take a closer look at the numbers.

Last week’s news

The only real news last week was the release of the minutes of the last meeting of the Federal Open Market Committee. Markets were looking for confirmation that the Fed expects to hike rates by another 25 basis points at the March meeting. They got that confirmation, as the minutes showed that officials were on track to raise rates even before the recent data showing stronger wage growth and inflation. The tax cut certainly had an impact on that, with a number of Fed members increasing growth estimates. Plus, the spending bill should only add to that trend, increasing the odds of more rate hikes past March.

What to look forward to

On Monday, the new home sales report dropped from 643,000 in December to 593,000 in January, well below expectations for 647,000. This was partially offset by an upward revision to December’s data, but it was still a weak report. Labor and material shortages have contributed to weak construction levels, so this probably is more reflective of the supply side than the demand side, but it will bear watching.

On Tuesday, the durable goods orders report is expected to show a substantial drop in headline growth, from a positive 2.8 percent in December to a negative 2.5 percent in January. The headline number is volatile, as it is driven by large variations in aircraft orders, so this drop is less worrying than it seems. The core orders number, however, is also expected to decline, though by much less. Strong growth of 0.7 percent in December is expected to drop back to a still healthy growth level of 0.3 percent in January. There may be some downside risk here, indicating that business investment is likely to slow from the last quarter.

Also on Tuesday, the Conference Board’s consumer confidence survey will be released. It is expected to do somewhat better, ticking up from 125.4 to 126, both of which are very high levels. With the effects of the recent tax cut showing up in paychecks, some upward bump is reasonable. On the other hand, rising gas prices and the stock correction earlier this month may present some downside risk. In any event, this is a high level of confidence and should continue to support the economy.

On Thursday, the personal income and spending report will give us a look at the facts underlying the consumer confidence report. Income growth is expected to drop from 0.4 percent in December to 0.2 percent in January, still a reasonably healthy level. There is some downside risk here on a decline in hours worked. Personal spending is expected to show the same pattern, down from 0.4-percent growth in December to 0.2-percent growth in January. Here, the underlying data is somewhat worse, with much of the gain coming from higher gas prices, rather than more constructive spending growth.

Finally, on Thursday, the Institute for Supply Management’s Manufacturing index is expected to tick down from 59.1 in January to 58.7 in February. Manufacturing continues to be supported by a weak dollar and strong global growth, so it should continue to be additive to the economy as a whole.

The other potentially significant economic news this week will come from the new chair of the Fed, Jerome Powell. He will offer testimony before Congress on Tuesday and Thursday. While markets are expecting a rate hike in March, his testimony will be watched for hints about further rate increases this year.

Have a great week!

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