G10 Key Events: FOMC to Downgrade Rate Outlook?
Analysts at Nomura explained the key events for the week ahead in the G10.
Key Quotes:
"The March FOMC meeting will be in focus, but there will also be key data on producer and consumer prices, as well as consumer, housing and industrial activity."
"US Economic Outlook Better data but not out of the woods: Data suggest growth is picking up in Q1, but financial conditions and weakness in the industrial sector remain key risks."
Week in a Nutshell:
"The key event next week will be the FOMC meeting on 15–16 March. In line with market expectations, we expect the Committee to keep the fed funds target range unchanged at 0.25–0.50%.
Both the economic data and some financial conditions have improved in recent weeks. Nonetheless, we think the FOMC will want time to assess the forward momentum in growth and inflation given the recent shocks to financial conditions. While data have generally held up, they are not pointing to robust growth. After incorporating this week’s GDP-relevant data, our GDP tracking estimate for Q1 is 1.8%. (Q4 2015 tracking is 0.7%.) Employment growth averaged 207k jobs per month in the first two months of 2016, but other labor market indicators such as wage growth and the aggregate hours worked index have been weak.
The Federal Reserve Board staff's Labor Market Conditions Index (LMCI)—a factor model that includes 19 key labor market indicators—declined in both January and February. The industrial side of the economy continues to underperform in response to declining investment in the oil and gas sector and drag from past appreciation of the dollar.
The number of drilling rigs operating in the U.S. is down 40% since June of last year, and that follows a more than 50% decline in the first half of 2015. Financial conditions have recovered significantly over the past four weeks.
However, some aspects of financial conditions, particularly relating to credit, remain tighter than they were in December. Moreover, the volatility in financial markets this year may be a drag on growth going forward (see US Financial Conditions Monitor, Special Report, 11 March 2016). The external outlook remains challenging. There is little evidence of more robust growth in the rest of the world. Recent commentary by Federal Reserve Officials does not suggest that a change in policy is imminent. If our economic outlook proves to be correct, we continue to believe that the next rate hike is likely to come at the June meeting. With the fed funds target range unlikely to change, the more interesting question will be how the FOMC’s outlook on the economy and the path of monetary policy evolves in the new set of forecasts.
Given the resilience of the economy and the recovery in financial conditions, we are not expecting significant changes in the FOMC’s economic forecasts. However, we are expecting downward revisions to the FOMC’s interest rate forecasts of 25bps in the median for 2016 and 2017.
In addition to the FOMC meeting, we will receive a plethora of data next week. On inflation, we forecast that core CPI increased by 0.17% m-o-m (+2.2% y-o-y) in February. This would be a slowdown from the 0.29% m-o-m increase in January. We expect some slowdown, as we believe that some of the increase in the prior month was transitory and we expect the lagged effect of the stronger dollar will offset to some extent the positive impact from the recent tightening of labor markets. On headline CPI, we forecast a decline of 0.21% m-o-m (0.9% y-o-y) as energy prices should weigh further on headline inflation.
The Federal Reserve Bank of New York will report the results of its consumer survey for February, while the University of Michigan releases the preliminary results from its March survey. With inflation expectations having trended lower over the past several months, further declines in these indicators would renew concerns about inflation expectations moving lower and could affect the Fed’s efforts to push inflation back up toward its 2% target. Also, results from regional business surveys (e.g. Empire State, Philly Fed) will give us an early read on the status of manufacturing activity in March. On housing, we will get the NAHB housing market index for March and housing starts for February. Other data include industrial production and PPI for February and JOLTS for January."
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