Ahead of the March FOMC Meeting

The markets' reactions to this week's Treasury auctions and US economic data could determine whether the Fed adjusts policy to address unsettled markets at the March 16-17 FOMC meeting.   A sharp rise in yields and drop in stocks. particularly after the auctions, presumably would be required to move the Fed.  While the Fed would likely discount a high February Core CPI as transitory, an increase in the University of Michigan 5-Year Inflation Expectations could raise eyebrows.  Last week's February Employment Report had a very strong headline figure, but some of the internals were not strong.  So, it is not enough to move the Fed.

Treasury auctions 3- and 10- year notes and a 30-year bond on Tuesday, Wednesday and Thursday, respectively.  Yields on these securities already have risen sharply.  Since the last auctions in mid-February, the 3-year is up about 15 BPs and the 10- and 30-years are up about 40 BPs.  A question is whether these higher yields will attract a lot of demand.  But, even if the yields have to push higher ahead of the auctions to do so, the ultimate question will be if there is a relief rally or at least a flattening in yields subsequent to the auctions.  A stabilization of yields could be more important to the Fed than their level and hold back any change in policy.  

Expectations for the February inflation data are benign.  Consensus looks for a trend-like +0.2% m/m for the February Core CPI, keeping the y/y at 1.4%.  The components are likely to be mixed, with some components, like housing rent, held down by the impact of the virus and others boosted by pass-throughs of higher oil prices or weaker dollar.  Consensus sees the February Core PPI slowing to +0.3% m/m, after the 1.2% jump in January.   Consensus also expects the U of Michigan 5-year Inflation Expectations to stay at 2.7%, which would keep it at the high end of its range.  

Evidence on the real-side of the economy is more mixed than might be obvious from looking at headlines.  Leisure and Hospitality re-openings were behind the bulk of the +379k m/m February Payroll increase, with jobs elsewhere rising modestly for the most part.  Total Hours Worked in the month actually fell 0.5%, as the Workweek dropped back from an outsized level in January.  The 2-month average of THW is only 0.6% (annualized) above the Q420 average, arguing that the Atlanta Fed model's latest forecast of 8.3% for Q121 Real GDP Growth is much too high.  The Phil Fed's ADS Business Conditions Index puts GDP growth only slightly above its 1.8-2.0% trend so far in Q121.

Other developments also take the edge off the idea of very strong growth immediately ahead.  The fiscal stimulus bill coming out of the Senate looks to be somewhat smaller than the $1.9 Tn House bill, as both one-time payments and Unemployment Benefit supplements were cut back.  And, the pass-through of higher oil prices will offset much of the stimulus to households' purchasing power.  Oil prices appear to be heading even higher into the Spring, as OPEC decided not to boost output in April.