What's Important in Next Week's FOMC Outcome and US Economic Data Releases

While this week's 25 BP rate hike at the FOMC Meeting will likely get the most attention, the forward guidance in the "dots" chart should be more important for the markets.  The rate hike has been well signaled at this point.  So, the question is whether the Fed is sticking with its gradual approach to tightening.  Stocks and Treasuries should take the rate hike in stride if the forward guidance of 2-3 hikes this year does not change.  In particular, stocks should rally after the Statement is released on Wednesday if forward guidance does not change.
 
This week's US economic data releases may be the more important news -- particularly if they begin to lay the groundwork for slower-than-expected economic growth into the Spring.  Even without laying this groundwork, consensus-like prints would support the gradual approach to monetary policy tightening that the Fed will likely say again in its FOMC Statement and embodied in its forward guidance.  In particular, consensus looks for modest increases in February Retail Sales (+0.1% m/m Total, +0.2% Ex Auto) and the CPI (+0.1% Total, +0.2% Core).  So, the markets are likely to take near-consensus prints in stride, as well.  Weaker-than-consensus data, however, would raise questions whether economic growth is as strong as markets believe -- negative for stocks, positive for Treasuries.  And, weak data could push back market odds of the next Fed rate hike toward September and away from June.  A key piece of evidence to watch is whether Initial Claims climb above the 244k Q117 average.

There already is a sharp disagreement between the Atlanta Fed and New York Fed models regarding Q117 Real GDP Growth.  The Atlanta Fed projects 1.2% (q/q, saar), but NY Fed projects 3.2% (as well as 3.0% for Q217 Real GDP Growth).  In the past two quarters, the NY Fed model did a better job predicting current-quarter GDP Growth -- as the Atlanta Fed model had difficulty predicting the large swings in net exports that happened then.  These projections can change as more data come in.

It is conceivable that Q117 Real GDP Growth will come in between these projections, as the fact that the Unemployment Rate did not fall in Q117 hints of GDP growth around the 1.5-1.7% trend.  The strong job growth in January and February may have been caused by factors other than above-trend GDP growth.  The warm weather could have boosted job growth more than GDP growth, especially as a decline in heating oil expenditures held down the latter.  Also, some of the job growth in Q117 could have been catch-up after a slowdown in Q416 -- independently of GDP.  The Q117 earnings season could depend on which of the model's GDP projections is correct.