The stock market will likely remain focused on the Russia/Ukraine war this week. While the fighting appears to be intensifying, there have been some optimistic comments from Russian and Ukrainian officials regarding peace talks. Another round of negotiations are expected early this week.
The markets are not likely to be moved much by a 25 BP hike at this week's FOMC Meeting, as it has been well signaled. But, revised Central Tendency Projections could hurt stocks, as the revisions should show lower Real GDP Growth but much higher inflation for 2022 than the Projections done in December. And, the "dots" chart should show more expected rate hikes this year than the three seen at the December meeting.
Nevertheless, these are only forecasts, and the Fed's policy stance could ultimately be viewed positively from a stock market perspective if the Statement or Powell in his post-meeting news conference emphasizes the downside risks in the outlook (both for economic growth and inflation) and the likelihood of a gradual, measured path of tightening ahead.
The revised Central Tendency Projections are likely to take account of the surge in energy prices and drop in stock market, both of which hurt the consumer. A similar drag on non-US economic growth could hurt US exports, as well. The high end of the Central Tendency for Real GDP Growth probably will be reduced more than the low end. The revised Central Tendency Projections for the PCE Deflator (Total and Core) will most likely be revised up sharply, reflecting the jump in oil prices, speedup in wage inflation and continuing impact of shortages. But, these forecasts are highly tentative, as they could reverse dramatically if the Russia/Ukraine war ends. So, the markets should view them with caution.
December Fed Central Tendency Projections for 2020*
Real GDP Growth 3.6-4.5
Unemployment Rate 3.4-3.7
Total PCE Deflator 2.2-3.0
Core PCE Deflator 2.5-3.0
* Q4/Q4 percent change for all items except for the Unemployment Rate which is Q422 average.
The stock market will likely take in stride a gradual path of monetary policy tightening as long as US economic growth is robust -- as was the case in the 2015-2017 tightening episode. So, this week's US economic data should be positive for the market if they are strong. The consensus estimates are mixed. Consensus looks for +0.4% m/m for February Retail Sales, with Ex Auto up 1.0% -- very decent prints but strength has to be confirmed away from higher-priced gasoline sales. Housing data are expected to remain volatile. Consensus sees February Housing Starts up 2.7% m/m, but Permits down 2.6% -- both are partial offsets to January's m/m changes. February Existing Home Sales are seen falling by 5.2% m/m, but this too just would partly offset January's jump. Manufacturing data are mostly expected to be solid. Consensus expects +0.5% m/m for February Industrial Production, with Manufacturing Output up a strong 0.8%. The March Phil Fed Mfg Index is seen edging down, but the NY Empire State Mfg Index rising after it appeared to pull back too much in February.
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