Introduction

Wait and see describes monetary policy right now and also the outlook for the economy and, more specifically, whether the decline in the dollar is now beginning to boost exports. Inflation is another possibility to watch out for and one that is being red flagged by a run of district bank presidents who, fearing its onset, are pushing for an immediate rate hike. But Janet Yellen is the boss and she repeated, in comments during this week's nostalgia night at the Fed, that easy policy is the Fed's policy, that she's in no hurry to withdraw any more stimulus.

The economy

Getting back the competitive edge

The dollar is down and factory data are beginning to show life. Now not all the news is good, of course, but where there's smoke there's probably fire, at least there should be for a sector that has been struggling and where comparisons are very easy. First the bad news as factory orders in February fell 1.7 percent, more than reversing January's very strong 1.2 percent gain. Price contraction held back dollar totals for petroleum and coal orders while, more gravely, capital goods showed weakness with core readings falling sharply. Weakness here points to continuing trouble for business investment and continuing slow growth for the nation's productivity. Total new orders, as seen in the columns of the graph, have been edging lower for the last year-and-a-half, from roughly $500 billion per month to $450 billion per month. But the good news is the red line in the graph which is the ISM new orders index. This index, which is closely watched as a leading indicator for the nation's factory sector, had been moving gradually lower in line with actual orders but has suddenly shot higher, to 58.3 in March for the strongest level since November 2014 and the strongest month-to-month acceleration since March 2009.

Showing a similar pattern is red line of the ISM's backlog index, edging lower from August 2014 before turning higher beginning this year. Contraction in backlogs is not a positive for employment where factory payrolls grew only fractionally during all of 2015, up a paltry 26,000 to end the year at 12.3 million. Unfilled factory orders, as measured by the government and tracked in the gray columns, have fallen steadily from a cycle peak of $1.22 trillion in November 2014 to $1.18 trillion in the latest data for February. It's this declining pool of orders that has raised the urgency to keep inventories down where the inventory-to-shipments ratio, at 1.37, is at its fattest level of the cycle, since the meltdown days of July 2009. But here too, if ISM indications prove true, the worst may be over as the ISM's backlog index, though modest looking at only 51.0, is nevertheless at its highest level since May last year.

Dollar down, orders up

What's behind the gains for the ISM order readings? A rise in exports is a definite possibility as the ISM index for new export orders jumped to 52.0, a plus-50 reading that's not quite red hot but still the best since December 2014. And the month-to-month acceleration of 5.5 points, like that for new orders, is exceptional, the sharpest since April 2011. But the gains in exports are not consistent with global demand which the Fed, including Janet Yellen, describes as soft and uncertain. Yet the gains are consistent with ongoing dollar depreciation, a dip that comes to several percentage points so far this year. The decline in the trade-weighted dollar has actually been downright severe of late, at 1.1 percent in February and another 2.6 percent in March for the steepest two-month fall since May 2009. Is all this a coincidence? The fall in the dollar, the rise in orders? Can exports move that quickly in relation to the dollar? But exports definitely rose in the latest data which are for February, up 1.5 percent for exported goods to $118.6 billion as tracked in the columns of the above graph. Goods exports peaked this cycle near $140 billion per month in third-quarter 2014 before falling steadily in line with the dollar's long rise. The rise in the dollar is depicted in the graph as a decline (values are reversed) in order to show how closely the inverse relation is -- as the dollar moves so exports move in reverse. But the latest movement for the dollar is down, not up, and when listening to Janet Yellen one gets the strong impression that Federal Reserve policy, that is the extension of current stimulus, will continue to be dollar negative and factory positive.

You want our services?

To the frustration of all the presidential candidates, of course, there's more good economic news I have to report. The ISM non-manufacturing index, as tracked in the dark line of the graph, rose 1.1 points in March to a 54.5 level that is well above breakeven 50 and points to solid economic growth for the great bulk of the nation's economy. New orders are even more solid at 56.7 for their strongest rate of monthly growth so far this year, while backlog orders, at 52.0, have now expanded for three months in a row. And perhaps in another early sign of the dollar's positive effects, new export orders are up a very sharp 5 points to 58.5 that follows a 7 point surge in February. The gain for this export reading, boosted by strong demand for the nation's technical and managerial services, is a reminder of the increasing importance of service exports to the nation's economy, totaling $59.5 billion in February for no less than, that's right, 1/3 of all exports! Showing less strength in March was the services PMI from Markit Economics which, however, did pop slightly higher in the latest reading as seen in the graph's light line. These two indexes track the economy's central core, a core that's inward looking and domestic based and which nevertheless may now, like the factory sector, be getting a dollar-related lift from export demand.

Markets: bond market stampede

Yellen repeated her gradualistic outlook at Thursday's Fed gala that united (at least by video in the case of Alan Greenspan) all four monetary bosses of the last 35 years. What stood out for current policy is Yellen's wait-and-see approach, her patience to keep stimulus in place while the job market expands and until inflation begins to bite. Though the Fed is formally on the record for two rate hikes this year, the Treasury markets appears to be pricing in just one hike at the very most and perhaps none at all this year. Accounts are showing no fear of the Fed, continuing to pour into Treasuries and driving the 2-year yield lower in the week to 0.70 basis points, down 4 basis points and down 35 basis points on the year. The spread between the 2-year and 10-year yields has flattened a bit this year, moving from 125 basis points to roughly 100 with the 10-year yield currently at 1.72 percent. A tighter yield spread is consistent, not with expectations for accelerating expansion, but for expectations of economic cooling. Cooling aside, oil had a very good week, up 7.7 percent and back near $40 at $39.50, but it didn't help stocks where the Dow fell 1.2 percent to end the week at 17,576.

The Bottom Line

Getting a boost from declines in the dollar that are tied to still accommodative wait-and-see Fed policy, the factory sector could be shifting out of neutral and could very well give a lift to the 2016 outlook. This at the same time that the service sector may be getting its own export-related boost. But these gains have yet to become trends and the outlook for the economy, especially for Janet Yellen and the FOMC, is another year of flat economic growth.

Week of April 11 to April 15

Inflation is the theme in this week's calendar starting off on Tuesday with import & export prices followed by producer prices on Wednesday and consumer prices on Thursday. All are expected to get a boost from the recovery in oil prices with core rates, in a special plus, also showing strength, but probably not enough strength however to heat up talk of a June rate hike. Retail sales will be posted Wednesday and are expected to be held down once again by vehicle sales. And even with another respectable showing for core sales, the results aren't expected to lift first-quarter GDP estimates. Consumer sentiment has been holding in better than consumer spending and will be posted on Friday along with industrial production where, however, slowing is expected for the manufacturing component.

Tuesday

Small Business Optimism Index for March

Consensus Forecast: 93.6

Consensus Range: 93.5 to 93.9

The small business optimism index dropped noticeably in February and a solid rebound is expected for March, at a consensus 93.6 for what would be a 7 tenths gain. February was held down by slowing in labor market components with sales expectations and earnings trends very weak. Softness in this report has underscored the moderate degree of economic growth.

Import & Export Prices for March

Consensus Forecast for Import Prices, M/M Chg: +1.0%

Consensus Range: +0.1% to +2.0%

Consensus Forecast for Export Prices, M/M Chg: 0.0%

Consensus Range: -0.4% to +0.4%

Import & export prices have been suffering through a long run of contraction but February showed improvement and more is expected for March. The consensus is calling for an oil-based 1.0 percent jump for import prices, vs February's minus 0.3 percent, and no change for export prices, vs minus 0.4 percent in February. This year's roughly 5 percent decline in the dollar should begin to ease deflation on the import side.

Treasury Budget for March

Consensus Forecast: -$102.0 billion

Consensus Range: -$104.0 to -$88.0 billion

The Treasury budget is expected to show a $102.0 billion deficit in March which is the sixth month of the government's fiscal year. Five months into the fiscal year in the February report, the Treasury's deficit was nearly 9 percent wider than a year ago and is expected to widen further, by about 20 percent to $550 billion by fiscal year-end.

Wednesday

Retail Sales for March

Consensus Forecast: +0.1%

Consensus Range: -0.4% to +0.3%

Retail Sales Ex-Autos

Consensus Forecast: +0.4%

Consensus Range: +0.2% to +0.7%

Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: +0.3%

Consensus Range: +0.2% to +0.6%

Weakness for auto sales is expected to hold down retail sales to only a 0.1 percent gain in March. Otherwise, sales are expected to show solid strength, at plus 0.4 percent for March's ex-auto reading and plus 0.3 percent for ex-auto ex-gas. Growth for the core ex-auto ex-gas reading has been holding up well at a solid year-on-year trend of just over 4 percent vs roughly 3 percent for total sales. Price weakness for gasoline has held down sales at gasoline stations but a rebound, tied to the recovery in oil prices, is expected for March. This report will close out the first quarter for retail sales which in February and January, pulled down by weak vehicle sales, showed back-to-back declines.

PPI-FD for March

Consensus Forecast: +0.3%

Consensus Range: 0.0% to +0.4%

PPI-FD Less Food & Energy

Consensus Forecast: +0.2%

Consensus Range: +0.1% to +0.3%

Helped by gains for oil-related prices, the headline for March's producer prices report is expected to rise 0.3 percent in March after slipping 0.2 percent in February. The core rate is expected to bounce 0.2 percent higher after coming in unchanged in February, a month when service prices were especially soft. Service prices, stalled at a 2.5 percent year-on-year rate, will have to pick up in order to lift overall prices.

Business Inventories for February

Consensus Forecast: -0.1%

Consensus Range: -0.2% to +0.2%

Business inventories have been flat but not flat enough relative to sales which have been on the decline. The stock-to-sales ratio, at 1.40 in January, was the heaviest since 2009. Unwanted inventories are negatives for the production and employment outlooks. The consensus forecast is calling for a 0.1 percent dip for business inventories in February.

Thursday

Consumer Price Index for March

Consensus Forecast, M/M Chg: +0.2%

Consensus Range: +0.1% to +0.5%

CPI Less Food & Energy

Consensus Forecast, M/M Chg: +0.2%

Consensus Range: +0.1% to +0.3%

Boosted by March's sharp jump in gasoline prices, consumer prices are expected to rise a welcome 0.2 percent. But the core rate, which excludes energy and also food, is also expected to show strength, also at a consensus of plus 0.2 percent. Traction for service prices in this report has been leading the core higher including higher costs for medical care and for housing. Momentum in this report has been clearly upward but, for the total inflation picture, has yet to be combined by increases in wages which remained flat.

Initial Jobless Claims for April 9 week

Consensus Forecast: 267,000

Consensus Range: 253,000 to 280,000

Initial jobless claims the last several weeks have held rock steady near record lows. Forecasters see initial claims coming in unchanged at 267,000 for the April 9 week. Continuing claims have also been very positive, trending down to new record lows. Low levels of unemployment claims point to healthy demand for labor.

Friday

Empire State Index for April

Consensus Forecast: +3.00

Consensus Range: -0.50 to +10.00

The Empire State report was the first of several regional reports in March to signal a rebound following a half-year of contraction. New orders showed substantial strength in the March report and they support the consensus forecast for plus 3.00 in the overall index for April. This doesn't sound like much but would be the strongest reading since March last year. The 6-month outlook was also strong in the February report, pointing to optimism that this year's dip in the dollar is certain to help exports.

Industrial Production for March

Consensus Forecast, M/M Chg: -0.1%

Consensus Range: -0.5% to +0.4%

Manufacturing Production

Consensus Forecast, M/M Chg: +0.1%

Consensus Range: -0.2% to +0.3%

Capacity Utilization Rate

Consensus Forecast: 75.4%

Consensus Range: 75.0% to 76.9%

Swings in utility output, typical at this time of year and especially evident during this winter's unusual weather, often skew the headline for the industrial production which dropped 0.5 percent in February to mask a respectable 0.2 percent rise in the manufacturing component. Forecasters see overall production improving but still slipping by 0.1 percent in March with manufacturing slowing, to only a consensus 0.1 percent gain. This report, at consensus, would not raise the economic outlook.

Consumer Sentiment, April Flash

Consensus Forecast: 91.8

Consensus Range: 90.0 to 94.2

The consumer sentiment index has been holding steady as have other confidence readings despite complaints about low wages and confusion surrounding the political campaign. Forecasters see a gain for the April flash, up 8 tenths to 91.0. As far as the economic outlook is concerned, strength in confidence readings has been an offset to this year's slowdown in consumer spending.