Upcoming US Economic Data and the Fed's "Dots"

In the next week and a half, the markets will likely focus primarily on the rate expectations embodied in the "dots" at the March 20-21 FOMC meeting -- each dot represents an expectation of the year-end level of the funds rate.  The  question will be whether the Fed retains its consensus expectation of three 25-BP hikes in 2018 or increases it to four.  A 25 BP rate hike at the meeting is an almost foregone conclusion, so the question is whether there will be 2 or 3 more in the remainder of the year.  To make matters more complicated, if the Fed increases its expectation to 4 hikes this year but lowers it to 2 from 3 hikes in 2019 (thereby keeping the 2.8% year-end 2019 level of the funds rate), the markets could take the decision in stride.

If upcoming US economic data do not raise the probability of 4 rate hikes this year, the stock market is likely to have an upward bias going into the March FOMC Meeting.   Conversely, stocks would likely turn down if the data are too strong.  Any sell-off in stocks will likely be short-lived, however.   This is because expectations for corporate profits remain very strong.   S&P 500 corporate earnings are seen rising 17.0% (y/y) in Q118, up from a strong 15.0% in Q417.   They are seen strengthening further to 18.9% in Q218 and 20.7% in Q318.  So, a sell-off would likely be a buying opportunity ahead of a rally to new highs in April-May.

Upcoming US economic data, particularly Tuesday's February CPI and Wednesday's February Retail Sales, will have significance to the extent they shift the probabilities between 3 or 4 rate hikes in 2018.  Consensus-like prints (0.2% m/m Core CPI, keeping the y/y at 1.8%, and 0.3% m/m Ex Auto Retail Sales) would probably not shift the probabilities.  Neither is too high to panic Fed officials or too low to remove their concerns regarding future inflation or growth.  But, there is more upside than downside risk to the Core CPI.

The upside risk to the February Core CPI comes from apparel prices.  To be sure, the 1.7% m/m surge in apparel prices that added a 0.1% pt to the 0.3% m/m January Core CPI should not repeat itself, since at least some of the jump likely resulted from a one-off end of heavy holiday-related discounting.  But, apparel prices still could rise notably in February for two reasons.   First, their bi-monthly sampling by the Bureau of Labor Statistics means that some of the snapback from holiday discounting will show up in February as well as in January.  Second, higher-priced Spring clothing could be captured in February -- with the risk that more will be captured than expected by seasonal factors.  So, while a 0.2 m/m rise in the February Core CPI seems reasonable, a 0.3% print can't be ruled out.

A 0.3% m/m increase in February Ex Auto Retail Sales, with no significant upward revisions to December or January, would not likely change GDP forecasts.  The Atlanta Fed's model is now projecting 2.5% (q/q, saar) growth for Q118 Real GDP, while the NY Fed model is now 2.8%.  Both are in line with the 2.2-2.6% Fed's Central Tendency for 2018.  So, along with the steady 4.1% February Unemployment Rate reported on Friday, there would be no compelling reason from the real-side of the economy for the Fed to change its expectation for 3 hikes in 2018.