A look forward at the March 16 week centers around the FOMC meeting on Tuesday and Wednesday. There is a high degree of uncertainty about what the FOMC will conclude is the best course of action for monetary policy in the present circumstances. Much will depend on if the declaration of a national emergency will finally give financial markets a sense that the government is taking developments around the spread of COVID-19 seriously. That in combination with the March 3 intermeeting rate cut by the FOMC and successive announcements out of the New York Fed – on directives from the FOMC — on March 9 and March 12 to aggressively address liquidity constraints in credit markets could help calm things down. Additionally, actions on the part of state and local governments and many business entities to realistically mitigate spread of the disease brings a greater sense of control to the public’s increasingly panicked attitude.
If markets appear more settled in advance of the release of the meeting statement and update to Summary of Economic Projections (SEP) at 14:00 ET on Wednesday, I anticipate these will include a carefully crafted assessment of current economic conditions and the outlook that highlights that much is presently unknown about the progression of the pandemic and the risks for the domestic and global economies. It makes setting monetary policy fraught with uncertainties. At present, I anticipate a 50 basis point reduction in short-term rates accompanied by forward guidance that rates will remain low for some time. This will provide some insurance in combination with actions by fiscal authorities and leave a little more room to cut rates at the April 30-May 1 meeting, if it is seen as necessary when the FOMC has a little more hard data to review. I do not expect that another large scale asset purchase program will be proposed just yet although it will definitely be on the table.
See the Whetstone Analysis preview from March 13 “March 17-18 FOMC deliberations will mull options against a backdrop of uncertainty”.
Chair Jerome Powell cannot be looking forward to his 14:30 ET press briefing on Wednesday. There are many questions about the economy, the outlook, and the Fed’s responses and plans that simply cannot be answered with a high degree of conviction at the moment and won’t before the extent of the damage done by the coronavirus pandemic is clearer. Probably the most that can be said is what is always behind setting monetary policy – it is not on a preset course, policymakers are data dependent and will set policy according to the dual mandate and without reference to politics, and will use all available tools to get the economy to maximum employment and price stability around the Fed’s 2% symmetric goal. That will include using the tools at hand and dusting off the ones on the shelf, if needed. It may even mean getting creative with some new ones. One thing that is pretty clear is that going to negative rates is near the bottom of the list.
There are a few pieces of economic data during the week that are somewhat more current relative to recent events. The New York Fed’s Empire State Manufacturing Survey is at 8:30 ET on Monday and the Philadelphia Fed’s Manufacturing Business Outlook Survey is at 8:30 ET on Thursday. Both are for March and will reflect conditions early in the month. The nascent revival evident in January and February is anticipated to end with new orders losing upward momentum, order backlogs declining again, and disruptions along the supply chain adding to vendor lead times and problems keeping production schedules. Inventories of finished goods are expected to draw down further. Some of this could be alleviated in April after China resumes production of goods later in March. However, unless it is in construction or medical supplies, it may be a while before activity ramps up again.
Data on industrial production and capacity utilization in February at 9:15 ET on Tuesday may be another casualty of COVID-19. The numbers are expected to be in line with increased activity in manufacturing, but the data was compiled before the severity of the impacts from the pandemic intensified. However good the news is, it will be disregarded as out of date.
The New York Fed’s Business Leaders Survey for March is at 8:30 ET is at 8:30 ET on Tuesday. This could give the first solid hint as to how much the service sector is feeling the closures and cancellations associated with the spread of COVID-19. Some sectors may not be particularly affected as yet, but certainly the hospitality industry is reeling. New York City as a tourist and business destination makes it unlikely the data won’t take a significant hit in revenues.
The NAHB/Wells Fargo Housing Market Index for March at 10:00 ET on Tuesday might not fall much from the 74 reading in February. Will the worries about COVID-19 and its economic consequences be enough to take consumers out of the market? Rates for mortgages are low – the Freddie Mac 30-year fixed rate hit a bottom at 3.29% in the March 5 data – and are certainly an incentive to get potential homebuyers out shopping for a property. Some consumers may not think buying a home is worth the risk right now, but others will move to lock in unusually favorable rates before home prices go up. Homebuilders have ramped up construction – aided by a relatively mild winter – in order to meet demand.
Housing starts and permits issued in February at 8:30 ET on Wednesday may not match the strong readings of January. Starts were slightly lower to 1.567 million units (SAAR), but that was the second highest since 1.649 million in December 2006. Another dip is not a signal of deterioration in these conditions. Permits issued are anticipated to decline after a 9.2% burst higher to 1.551 million units in January, the highest since 1.596 in March 2007. Some retracing is to be expected.
Sales of existing homes in February at 10:00 ET on Friday should reflect the closing of contract signed in January and register a solid number of sales. Prices are likely to be up again after a decline in January. Competition for existing units – and supplies are limited – could make it more of a sellers’ market. However, new construction has picked up in the segment that cater to first-time buyers who more usually opt for an existing property.
The numbers on retail and food sales in February at 8:30 ET on Tuesday should turn in a modest increase overall that will be restrained by sharp declines in prices for gasoline. Sales of motor vehicles were not much changed in February from January and the dollar value should not be up or down month-over-month. Mild weather and a few tax refunds could send consumers to home stores for building materials and gardening supplies. As the spread of COVID-19 came closer to home, sales of emergency and medical supplies probably increase at the expense of other consumer items like clothing or eating out. Nonstore retailers may have seen an uptick as consumers decided to get stuff delivered rather than frequent stores.
The Conference Board’s Leading Economic Index for February at 10:00 ET on Thursday is yet another report that will get scant attention due to the timing of its data. With more compelling and current information on hand, its predictive qualities are less of interest.
Initial jobless claims for the week ended March 14 at 8:30 ET on Thursday will include annual revisions and new seasonal adjustment factors for 2020. This makes the number a bit noisy, but the underlying story should remain the same for recent weeks. What is expected is that the first wave of layoff activity prompted by actions to stem the spread of COVID-19 will be felt. It is also expected to build in coming weeks. Some of these people will seek other jobs, but some will remain on the unemployment rolls until recalled by their original employer. This and other employment data are going to have a hard time distinguishing the temporary disruptions from labor market fundamentals. If closures are of only a few weeks, the labor market should recover its footing quickly. If efforts to control the pandemic become more severe, the competitive labor market will rapidly become far less so.
Other labor market indicators in the week will be greeted with a shrug, again due to the timing that the surveys were taken before developments in the last few weeks. The data on state and regional unemployment and payrolls at 10:00 ET on Monday is for January and includes annual revisions. It will hardly get a glance. The February numbers are set for 10:00 ET on Friday, March 27. Data on Job Openings and Labor Turnover (JOLTS) for February at 10:00 ET on Tuesday will incorporate annual revisions.
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