Inflation Next

The stock market should take Tuesday's release of the February CPI in stride if consensus estimates print, but the latter can't be taken for granted.  A consensus-like print would likely translate into a smaller increase in the PCE Deflator.  In the background, Powell's testimony last week and the February Employment Report keep open the door for Fed rate cuts by mid year -- a positive for stocks. 

The consensus estimates of the February CPI (+0.4% m/m Total, +0.3% Core) look reasonable, but they may require Owners' Equivalent Rent (OER) falling back to +0.4% from the extraordinary +0.6% in January and most other components flattening.  There is upside risk to Core if less favorable prints are the case.  Indeed, last year, the Core CPI sped up in February after a high January increase.  A component that contributed to the high February Core then was Airfares.  This year, a reduction in the fuel surcharge tax could hold it down.  The y/y for Core CPI should fall somewhat from 3.9% in January. 

The February Employment Report is Fed-friendly and could encourage officials to think of a possible rate cut by mid year.  Nonetheless, the latter will probably require additional evidence that economic growth is slowing and inflation trending down.  The increase in Continuing Unemployment Insurance Claims over the past two weeks supports this possibility.

On its surface, the +275k m/m increase in February Nonfarm Payrolls is stronger than desired by the Fed.  It is well above the 100k area that would clearly show a softening labor market and exceeds the +212k m/m Q423 average.  But, more than half of the February Payroll strength resulted from large gains in non-economic sectors, such as health care and government.  Some of the strength also might reflect one-off rebounds from adverse weather effects in January.  A weather rebound also could explain the bounce-back in the Nonfarm Workweek to 34.3 Hours from an upward-revised 34.2 Hours in January (was 34.1 Hours).  The Workweek in both months remain below the earlier 34.4 trend and still suggest softer demand for labor.  The large downward revision to +229k from +353k in January Payrolls confirms that measurement error was largely responsible for the surprising initial print.

The Household Survey data tend to be less affected by weather than Establishment Survey data.  So, the decline in Civilian Employment -- the 3rd m/m decline in a row -- offers reasonably significant evidence of a weakening labor market.  The latter is reflected in the jump in the Unemployment Rate to 3.9% -- a good move from the Fed's perspective.

A softer labor market may be one reason for the low +0.1% m/m increase in Average Hourly Earnings (AHE) in February, after a downward-revised +0.5% in January (was +0.6%).  The low February print alternatively may be just an offset to the January jump, with the 2-month average equaling trend.  This would not be a bad result.  The 0.3% m/m 3-month average of AHE is consistent with the Fed's 2% price inflation target, taking account of productivity growth.