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Look Back: February 18 week heavy on Fed speakers, economic data mixed

A look back at the February 18 week saw a little more catch-up in the economic data after the partial federal government shutdown and a few more current pieces of data. However, the week also had a great deal of focus on Federal Reserve monetary policy with the release of the January 29-20 FOMC meeting minutes on Wednesday and a series of comments from policymakers on Friday at a New York Fed US Monetary Policy Forum.

It was unlikely there would be anything earth-shattering in the remarks as delivered or subsequent Q&A give the proximity to Chair Jerome Powell’s scheduled semiannual monetary policy testimony on February 26-27.  However, it was reinforced that FOMC participants – voters and nonvoters alike – are more cautious on the rate outlook in spite of the strength in the labor market and have more ability to exercise patience due to tame inflation and modest inflation expectations. While short-term rates remain the primary tool of monetary policy, a hiatus on further rate hikes has created a space in which the balance sheet has assumed new prominence.  After comments from Vice Chair for Supervision Randal Quarles and Vice Chair Richard Clarida – both of whom gave the usual caveat that the views expressed were his own – it is clear that the discussion about how and when to cease the present program of balance sheet normalization is more advanced that the minutes released on Wednesday indicated. Quarles’ remarks offered a few possible scenarios, of which it seems most likely that the present program will simply be discontinued toward the end of the year and holdings of Agency MBS allowed to atrophy over time as the Fed returns slowly to a Treasurys-only composition. The end result would be a somewhat higher balance sheet that might be needed even in an “abundant reserves” regime, but it would also allow liabilities like currency in circulation to rise over time without significant disruptions. Clarida laid out the necessity for open discussion and clear communications.

It may well be that the FOMC will work to get its plan for winding down normalization in place sooner rather than later. There is an incentive in terms of the broader policy discussions that are ramping up to rethink and possible update the Fed’s framework for conducting monetary policy. This would assist markets to adjust to changes to balance sheet policy and do so before other issues are in full discussion could muddy the process.

There was not a particularly busy data schedule during the week. Data reports presented a variety of information.

On the plus side, initial jobless claims for the February 16 week fell 23,000 to 216,000. This brought the level back to the sorts of readings common before the partial government shutdown caused a short-term uptick. There seems to be no fundamental change in the health of the labor market.

Data for the housing market was mixed, although on balance pointed to the upside. Sales of existing homes were down 1.2% in January to 4.94 million units (SAAR) from December, and off 8.5% compared to a year-ago. However, these represent contracts signed late last year when mortgage rates were higher. The NAHB/Wells Fargo Housing Market Index for February gained 4 points to 62, its highest reaching since 68 in October, just when mortgage rates were starting to see a near-term peak. This suggests that optimism about the spring homebuying season is improved. There hasn’t been any fresh data on housing starts or permits issued since the November numbers. It could be that builders have been busy and anticipate renewed demand for new units at a time when the stock of existing homes is limited.

New orders for durable goods in December – a relatively old number at this point – managed to squeeze out a rise of 1.2% from November, a second month in a row of increases after up 1.0% in November. However, almost all of the increase was due to a jump in nondefense aircraft orders. Excluding transportation, orders were up a meager 0.1%. There is reason to think that the January data will be stronger after surveys of manufacturing indicated some pick up in activity.

The Philadelphia Fed Manufacturing Business Outlook survey for February hinted that the upward movement for January had lost momentum. The general business outlook index fell to -4.1 in February, its first negative since -5.1 in May 2016. The Philadelphia number tends to correlate well with the ISM Manufacturing Index.  While expansion is likely to remain in place, the data for the factory sector could well be less robust and more volatile than seen in 2018.

The New York Fed’s Business Leaders Survey for February was the first of the reports on service sector activity for the month. The current business activity index rebounded to 13.7 in February from 0.0 in January. Service businesses felt the pinch of the government shutdown in January as contracts went unpaid and/or unsigned. February should see a broad improvement in activity for other Districts.

The Conference Board’s Leading Economic Index was also affected by the shutdown, primarily on the uptick in jobless claims and the plunge in business confidence. The small 0.1% decline in January is likely to be reversed next month now that both those contributors have reversed. The Conference Board released its annual revisions with this report but is still lacking a few of the most recent pieces of economic data – significantly housing permits issued numbers. They plan to issue an interim report on March 4 to that will include the missing data.


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