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Look ahead to April 8, 2019 week: Inflation and inflation expectations should remain tame

The April 8 week has a select series of data reports, some of which will be of particular interest in advance of the April 30-May 1 FOMC meeting. The FOMC consensus – although not a unanimous one – is for further rate hikes to be on hold until the economic outlook is clearer – which may take some time. That includes the direction of global growth, the resolution of outstanding trade policy both at home and abroad, and determining if the recent reset in activity for services and manufacturing is more than just the fading of fiscal stimulus.

There have been calls for the FOMC to start reducing rates. However, it is not clear that stimulus is needed if growth is fundamentally sound with a strong labor market and tame inflation. Fed policymakers will be considering if the economy is better served by sustained growth at a moderate rate over time or tempting another boom-bust cycle by providing unnecessary monetary stimulus. The next two weeks will provide policymakers a chance to air their views before the start of the communications blackout period that begins at midnight on Saturday, April 20.

Apropos of the upcoming FOMC meeting, the week’s numbers will provide a close look at inflation and inflation expectations just after the Employment Situation for March indicated that the labor market is doing just fine.

The inflation data for March should reflect the recent increases in energy costs – especially the consistent and noticeable increases for gasoline. It is probably too soon to see any impact on food prices related to the flooding in Nebraska and neighboring states where early season planting has been disrupted, but the destruction of livestock could be a factor in driving up food costs. It is also possible that some spring fruits and vegetables will be pricier. If so, two of the most common transitory factors to suppress overall price gains may not in the next report. Outside of food and energy, other commodity costs have been mild and scattered. The week will have the Consumer Price Index at 8:30 ET on Wednesday, Final Demand PPI at 8:30 ET on Thursday, and the Import Price Index at 8:30 ET on Friday.

 

The Atlanta Fed’s Business Inflation Index for April at 10:00 ET on Wednesday may notch up from the 1.9% of February and March that were the lowest readings since 1.8% in October 2017. Delays in trade negotiations with China may not reassure that higher tariffs are not coming, and higher energy costs tend to push the reading upward. The University of Michigan’s 1- and 5-year inflation measures were both at 2.5% in March and April could see an uptick of a tenth or two in the face of rising energy prices, at least for the 1-year measure which tends to react quickly to such changes.

The NFIB’s Small Business Optimism Index for March at 6:00 ET on Tuesday should shake off some the worries that pushed the January and February readings to their lowest in over two years. The partial government shutdown ended in late January and the risk of another did not come to pass in mid-February. The contention around trade, tariff, and immigration policy is an ongoing risk, but at present appears to be at bay. The preliminary University of Michigan Consumer Sentiment Index for April at 10:00 ET on Friday probably won’t build on the 4.6 point increase to 98.4 in March. The components for current conditions and six-month expectations are more-or-less back on trend after the disruptions in January and February. Consumers are solidly optimistic.

The data on Job Openings and Labor Turnover (JOLTS) for February at 10:00 ET may not be at record highs, but it will not be far below that. Overall job openings remain plentiful, new hiring brisk, layoffs low, and workers are voluntarily switching jobs with confidence.

The full report on new orders for factory goods in February will reflect the already-reported 1.6% decline for durable orders and add in the expected increase for nondurables on higher petroleum prices. On net, the number is likely to remain a negative. Unfilled orders for durable goods were down 0.3% in February, suggesting that order backlogs will be less supportive of factory activity should there be a more prolonged downturn. Some of that was in the nondefense aircraft category which fell 0.6%. It is possible that Boeing has had cancellation related to the problems with its 737 MAX aircraft. If so, this should be more evident when Boeing reports on commercial aircraft orders for March which will include changes in order backlogs. Boeing typically releases this information on Monday or Tuesday of the second week of the month.

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