US Economic Data Continue to Support a Fed Rate Hike

The high January Core PCE Deflator (0.3% m/m and 1.7% y/y), along with the good-sized gain in Real Consumption, adds to evidence arguing for the Fed to hike the funds rate in March.  

      a.  The Market-Based Core PCE Deflator confirms the pickup in inflation, as it rose an above-trend 0.2% m/m with its y/y rising to 1.5% from 1.3% in December.

      b.  While the pickup in January inflation likely reflects start-of-year price hikes, the latter's impact risks showing up also in February inflation data as a result if bi-monthly sampling in the CPI.

      c.  Real Consumption risks speeding up to 3+% in Q115 -- some of the strength being weather-related.  This growth rate is in line with the Atlanta Fed's GDP Now Model.

Next week's US economic data are not likely to change the story:

      a.  February Mfg ISM risks moving up, as January "hard' data on the manufacturing sector -- IP, Manufacturing Payrolls, and Durable Goods Orders -- belied the weakness seen in the 48.2 January Mfg ISM.

      b.  February Payrolls should be decent, similar to the +151k in January, as there was not much change in the Claims data between survey weeks.

      c.  Average Hourly Earnings, however, should slow to +0.1% m/m from the +0.5% January print, based on calendar and compositional considerations.   The y/y should be steady at 2.5%.

While the risk of a March Fed Rate Hike could hold back the stock market in the next few weeks -- especially after the March 10th ECB meeting, stocks may very well decide to take a hike in stride, as I discussed in the prior blog.

Moreover, a rate hike would signal that Fed officials remain confident that the economy will continue to grow at an above-trend pace in coming quarters -- a positive for stocks.  Skipping a rate hike would signal serious concern about the health of the economy.