A Window for the Markets To Retrace?

The next few weeks -- up until the March 10th ECB Meeting, and possibly up to the March 15-16 FOMC Meeting -- risk being a window in which the markets retrace their recent trends -- based on fundamental considerations.  Stocks, dollar and commodity prices would rise, while bond prices fall.  What happens after March 16 will depend on what the Fed does.  I believe the door is still open for a rate hike in March, -- and the upcoming US economic data should support one (as discussed below).  But there could be some easing in the more important forward guidance.

The fundamental considerations are with respect to upcoming US macroeconomic data and market sentiment.  Over the next few weeks, most of the US macro economic data are likely to strengthen and push down expectations of recession.  While a number of second-tier Fed officials are scheduled to speak, their comments may very well be interpreted dovishly as market sentiment appears to favor the idea that the Fed will not hike rates at that meeting. 

Expectations of an ECB ease should help,  but the risk is that it disappoints the markets, as in December -- /1/ an ECB official already has warned the markets not to expect too much, /2/ the failure of the BoJ's move to negative rates to weaken the Yen for long stands as a warning that central bank moves other than the Fed may not be significant.

Here are some thoughts on the key US economic data that could impact the markets into early March.

Feb 17  January Housing Starts/Permits --  1-Family Starts are likely to rebound, as their Permits were stronger than their Starts in December.   The markets should ignore what happens to Multis -- besides being volatile, the bounce in Northeast Permits in December was in anticipation of a law change and should unwind in January.

Feb 17 January PPI -- Not important.  Besides the fact that Fed officials have dismissed currently low inflation as due to temporary factors, there could be start-of-year effects that are one-off.  The same applies to the January CPI, due February 19

Feb 17  January IP -- Risks printing stronger than the +0.4% m/m consensus.   Total Hours Worked in Manufacturing jumped 0.8% m/m (0.6% production workers) in January, and Utility Output should bounce as a result of the cold weather.   A decline in Mining Output should be a partial offset.

Feb 18 Initial Claims -- No estimate, but it will be an important sign of strength if they do not completely retrace their prior week's decline.  The same goes for Continuing Claims.

Feb 18 February Phil Fed Mfg Index -- Risk is for a stronger-than-consensus print (-2.8 versus -3.5 in January).   While the Index rose in January, it remained in negative territory, so it looks like  it understated the strength of manufacturing seen in the Payroll data and could catch up in February. 

Feb 22 February Markit Mfg PMI -- The Markit Mfg PMI rose in January, as well,  but only slightly.  And, the sharp weakening in the dollar this month could help sentiment.  So, it too risks rising further in February.

Feb 25 January Durable Goods Orders --  The drop in December Total, Ex Transportatation and Core Durable Orders could have been exaggerated by seasonal factors, which push them down sharply that month.  Seasonals boost them in January, so the risk is that they rebound.

March 1 February Mfg ISM -- This Index risks rising, and a 50 handle cannot be ruled out, after it was unchanged at 48.2 in January.  The January print belied the manufacturing strength seen in the Payroll data.

March 3 February Non-Mfg ISM -- This Index risks rising, as well, after it dropped in January.  A return to more seasonable weather should have helped retailers. 

March 4 February Payrolls/Unemployment -- While it is early to have an estimate, a Payroll print near January's +151k would seem to be good ballpark guess.  The trend in Claims post the January Payroll Survey Week so far is little different from the trend going into the January Survey Week.  And, the market volatility may have held back employers from hiring.   But, any Payroll gain above 95k is above trend and roughly speaking is enough to put downward pressure on the Unemployment Rate.

March 15 February Retail Sales -- The cold weather this month should help the sales of seasonable goods.  Fundamentally, labor income growth and low oil prices should keep the consumer as a driver of overall economic growth.