Introduction

There may be early signs appearing for a first-quarter bounce coming out of Europe but these are not the indications right now for the United States. The abrupt slowing in payroll growth in the prior week's employment report, not to mention general softness in the latest batch of economic data, have sealed expectations for a thoroughly cautious FOMC meeting in the coming week, one where economists expect a shaving in GDP forecasts and of course a pull back in the outlook for future rate hikes. Though wage indications out of the employment report were strong, underscored by this week's news on job openings, and despite isolated details of strength in this week's data, the message is clear and that is economic slowing. This week's list of troubles includes uncertainty over the consumer, mixed news coming out of manufacturing, weakness in home prices and a tangible slump in Jerome Powell's favorite indicator, inflation expectations. And inflation, or the lack of it, is where we start the discussion.

The economy

Housing makes up nearly half of the consumer price index and general softness here, fundamentally underscored by slowing home price appreciation, is not giving much lift to core consumer inflation which, in a rarity, missed expectations at only a 0.1 percent February gain. The year-on-year rate, as tracked by the red line in the accompanying graph, also missed expectations with a 1 tenth dip to 2.1 percent. Yet it's medical care, another major category, that was the smoking gun in the report, down a monthly 0.2 percent and reflecting only a marginal increase for physician services and sharp declines for hospital services and prescription drugs, down 0.7 and down 1.0 percent respectively. And overall housing costs at the consumer level, despite in-trend increases of 0.3 percent for both homeowner expense (owners' equivalent rent) as well as renters' expense, rose only 0.2 percent for a second straight month. Other readings were mixed with recreation falling 0.4 percent while communication costs were flat. Food, however, was up 0.4 percent with apparel up 0.3 percent. The headline CPI rose 0.2 percent as expected with the year-on-year rate at 1.5 percent.

Domestic housing may not be the only source of price moderation. Softness in global demand may also be pulling inflation down. Import prices at the headline level did bounce 0.6 percent higher in February but this may be deceptive. When excluding petroleum prices, which are recovering from the collapse at year end, import prices rose only 0.1 percent. Year-on-year, the ex-petroleum rate fell to minus 0.5 percent from January's 0.3 percent decline for the weakest showing in more than two years. This reading peaked at this time last year at 2.0 percent and has been heading down since. February's details on the import side show a second monthly price decline for food imports, down 0.8 percent for a 3.4 percent yearly dip. Industrial supplies and fuels & lubricants did show sharp monthly gains related to petroleum but finished good prices, as on the export side, remain nearly flat. Export prices also rose 0.6 percent in February, likewise helped by petroleum-related increases and also a small but welcome lift for agricultural prices which rose 0.3 percent. Yet year-on-year, total export prices were up 0.3 percent in February with agricultural prices still in the negative column at minus 0.2 percent.

For the Federal Reserve, the downward slope in import prices will be making their task of holding their 2 percent goal more difficult. But a perhaps greater threat appears to be emerging at the expectations level. Year-ahead inflation expectations among consumers, as measured by the University of Michigan, have clearly been sliding, down 2 tenths to 2.4 percent in preliminary data for March as tracked by the graph's blue line. The graph's green line tracks inflation expectations at the business level as measured by the Atlanta Fed and here too the story is same, at 1.9 percent in final data for March. There appears to be no accident that both of these measures are at their lowest levels since October 2017. Jerome Powell has repeatedly tied the central management of inflation to inflation expectations, the prior stability of which he attributes to this economic cycle's general lack of inflation.

If inflation expectations are the key to future inflation, consumer spending is the key for the economy as a whole. Retail sales for January opened the week and the good news, though tangible, was still unfortunately limited. Retail sales managed only a 0.2 percent headline gain in January after plunging a downward 1.6 percent in December. Demand for general merchandise is as good of place as any to find a reliable gauge to balance these unusual extremes and at a 0.8 percent January gain vs a 1.5 percent December loss probably puts in a nutshell the underlying message: deep and unusual weakness during the holiday season followed by a respectable rebound. Nonstore retailers, where e-commerce is tracked, shows the same theme, at plus 2.6 percent in January vs severe contraction of minus 5.0 percent in December.

The vast monthly swings apparent through all readings in the retail sales report are certain to have the Census Bureau once again double checking their winter adjustments. But for retail sales, no period has more seasonal extremes than the busy days of December vs the quiet days of January. One way to see past monthly swings is to look at year-on-year change yet the verdict is much the same, a collapse in December followed by incremental recovery in January. Retail sales rose at a yearly 2.3 percent rate in January following only 1.6 percent in December which was the worst performance of the expansion, since the recession days of November 2009. And for the larger picture, January isn't that much better. Nevertheless, for the first-quarter GDP outlook, January's results are positive as they show acceleration. For the Federal Reserve, the report is right in line with their move toward caution, waiting to see how events are unfolding.

Incremental recovery is also the theme for new home sales which in January came in roughly as-expected at a 607,000 annual rate. Though this is down a very sharp looking 6.9 percent from December, monthly comparisons are not recommended for this report which, compared to perhaps all other major economic reports, is the most volatile of all. Three-month averages are the gauge that the Census Bureau recommends to judge this series and this reading, as tracked in the blue line of the graph, rose 19,000 in January to a 629,000 rate for the best showing since June. But putting moving averages aside, there was in fact unfavorable news in the report as the median price of a new home fell 0.6 percent decline in the month to $317,000 which, in line with a host of other data pointing to slowing appreciation, suggests sellers are giving discounts to buyers. Still, the results offer hope that housing won't drag as much on the economy as it did in 2018 though sales of existing homes, as tracked in the green, have to show the same bounce.

Mixed is also the week's theme from the factory sector which ended a favorable 2018 mostly unfavorably and is beginning 2019 on an uncertain note. Boosted by a third strong month for commercial aircraft orders, total factory orders rose a moderate-to-solid 0.4 percent in January but when excluding aircraft and all other transportation equipment, January orders slipped into the negative column at a 0.1 percent decline. But in a critical plus, core capital goods orders (nondefense ex-aircraft) topped high-end expectations with a 0.8 percent gain to just about reverse December's 0.9 percent drop. And in another plus, and one that opens first-quarter business investment on a strong note, shipments for this series rose a sharp 0.8 percent. Capital goods were going in the wrong direction late last year and January's rebound is the certain positive in a report that, as durable goods orders often are, is clouded at the headline level by commercial aircraft. Whether future durable goods reports will be even more clouded by aircraft given the grounding of the Boeing 737 Max looks to play out in the coming reports and, at the margin, is another wild card for the 2019 outlook.

Capital goods were the week's good news for the factory sector. Now some more bad news. If it wasn't for a weather-related boost for utilities, industrial production in February would have been in the negative column for a second month in a row. As it turned out February's marginal 0.1 percent increase missed Econoday's consensus by a full 3 tenths while manufacturing, at minus 0.4 percent, came in well underneath the consensus range. Utility output, which is often volatile, jumped 3.7 percent in February following two prior sharp declines while mining output, which has been typically strong, posted a moderate 0.3 percent gain. But it's manufacturing and whether the sector, outward facing as it is toward the global economy, is at risk of sinking into the negative column this year. This may not be an exaggeration based on a second month of contraction for production that follows a revised 0.5 percent January decline. Occasional dips into negative ground aren't that unusual for this component as can be seen in the graph but this is the first back-to-back decline since mid-2017 which is right in line with signals from recent regional surveys including the Philadelphia Fed and Empire State reports.

Diminishing growth is now a common theme among many of the regional manufacturing reports including Empire State where the headline index, at 3.7 for March, missed low estimates. New orders, at only 3.0, were also just above zero and, like the headline, was the weakest showing since May 2017. Unfilled orders were likewise flat at 2.2 with inventories dead flat at zero. But shipments, at 7.7, were still moving out the door and firms in the sample were still hiring and briskly, at 13.8 vs February's 4.1. Price data were mixed with input costs showing pressure but not selling prices where traction is slipping. The general outlook for the sample remains favorable yet, at 29.6 and down 2.7 points, is a little less favorable than February. Manufacturing data have been wobbling since late last year with occasional strong showings the exception and mixed in with plenty of soft ones. Empire State's March results won't be lifting expectations much for next week's manufacturing data from the Philadelphia Fed which in February, echoing weakness much like that in this report, sank into the negative column for the worst showing in 2-1/2 years.

Hunting around for good news has been a bit of a challenge lately. But only good news, at least strong news, comes from the latest JOLTS report as job openings keep rising and employers are increasingly scrambling to fill them. At least this was the situation in January as opening rose 1.4 percent to 7.581 million to far exceed Econoday's consensus range. And January was a very strong month for nonfarm payroll growth as well which rose 311,000, and confirmation of the strong growth is offered by the hires data in the JOLTS report which rose 1.5 percent or nearly 100,000 to 5.801 million. Yet the spread with openings continues to widen, to a new record at 1.780 million. Year-on-year, openings are up 21.7 percent which dwarfs the 4.2 percent rise in hires. According to the text books, separation like this points to the risk of an inflationary flashpoint for wages which in fact have been showing visible traction in recent months. But a very important caveat to January's JOLTS was the February employment of the prior week where nonfarm payroll almost disappeared, rising only 20,000 and signaling cooling for the next JOLTS report.

Markets: Soft economic news definitely not holding back stocks

When looking at the stock market, the Federal Reserve's dovish stance would seem to be the explanation for this year's solid performance. The Dow rose 1.6 percent in the week despite trouble for Boeing and at 25,848 is up a very imposing 10.8 percent so far this year. This at the same time that many early forecasts for first-quarter GDP are looking for slowing, not acceleration from the fourth-quarter's 2.6 percent rate. GDP forecasts from the FOMC will be a major highlight of the coming week, or perhaps low light as estimates look to be trimmed. For the record, the last set of FOMC forecasts back in December had GDP growing at 2.3 percent this year and 2.0 percent next year. Slowing growth would not seem to justify accelerating growth for the stock market but dovish Fed policy together perhaps with the need to make up for the Dow's 5.6 percent decline last year are behind the market's strength. Dovish Fed policy is often a plus for the bond market and here specific expectations for a winding down of balance-sheet unwinding are also at play. Demand for Treasuries is also showing year-to-date strength with the 2-year yield, at 2.44 percent, down 6 basis points so far this year with the 10-year, at 2.59 percent, down 9 points.

The bottom line

Low inflation pressures, especially weakness in inflation expectations, could tilt the Federal Reserve's rate outlook, now at neutral, to the downside, and a turn lower for the economy in general, hinted at perhaps by last week's employment report, could raise the risk of further moderation for inflation in the coming months. There are positives, nevertheless, in recent data including the small but welcome bounce for retail sales and especially the jump in capital goods orders. Yet searching for positives may be an indication of trouble ahead.

Week of March 18 to March 22

The only news up for grabs in Wednesday's FOMC activity will be the quarterly forecasts and by how much GDP will be shaved and more importantly how many future rate hikes will be cut back. Expectations are universal that the FOMC will not change rates at the meeting but future rate hikes, penciled in last December at two for this year and one for next, look certain to be reduced. December's GDP estimate for 2019 was 2.3 percent slowing to 2.0 percent in 2020. Housing hasn't been a prominent topic for the Fed but could become one given the often dramatic downturn in related data. The coming week will see the housing market index from the nation's home builders where continued recovery is the expectation and existing home sales on Friday where improvement is also the call. Manufacturing will get an update on Tuesday with factory orders where advance data on the durables side of the report were mostly flat except for a notable rebound in orders and shipments of core capital goods.

Monday

Housing Market Index for March

Consensus Forecast: 63

Consensus Range: 60 to 66 

A third month of improvement is the expectation for March's housing market index where the call is 63 following what was a much better-than-expected 4-point gain to 62 in February. This index had been holding in the high 60 range before plunging suddenly in November to 60.

Tuesday

Factory Orders for January

Consensus Forecast, Month-to-Month Change: -0.1%

Consensus Range: -3.0% to 0.6%

Advance data for the durables side of the January factory orders report rose 0.4 percent while ex-transportation orders slipped 0.1 percent with core capital goods orders nearly reversing a prior drop with a 0.8 percent rise. Forecasters see factory orders in February, which will include initial data on non-durable goods, slipping 0.1 percent.

Wednesday

Federal Funds Target for March 19 & 20 Meeting

Consensus Forecast, Midpoint: 2.375%

Consensus Range: 2.375% to 2.375%

A pivotal change in policy from slightly restrictive to neutral was the memorable outcome of the January FOMC, reflecting a subdued assessment of inflation, slowing global growth along with risks tied to cross-border trade and Brexit. Econoday's panel unanimously sees the federal funds target holding to a range between 2.25 and 2.50 percent with a 2.375 percent central target. For the FOMC's quarterly forecasts, two 1/4 point hikes in 2019 were the call back in December with expectations for the March forecasts clearly pointing to a reduction.

Thursday

Initial Jobless Claims for March 16 week

Consensus Forecast: 225,000

Consensus Range: 212,000 to 243,000

Following the government shutdown, initial jobless claims have now steadied at the 220,000 to 230,000 level and are expected to come in at 225,000 in the March 16 week. Note that the March 16 week is the sample period for the March employment report which will focus extra attention on the results. Initial claims were at 229,000 in the March 9 week.

Philadelphia Fed Manufacturing Index for March

Consensus Forecast: 4.4

Consensus Range: -2.0 to 15.0

A rebound to a still modest consensus of 4.4 is the call for the Philadelphia Fed's manufacturing index for March which in February fell unexpectedly into negative ground, to minus 4.1 for the weakest showing since May 2016.

Index of Leading Economic Indicators for February

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.1% to 0.2%

The consensus for February's index of leading economic indicators is a marginal increase of 0.1 percent vs even weaker showings in January and December, of minus 0.1 percent and no change.

Friday

PMI Composite for March Flash

Consensus Forecast: 55.2

Consensus Range: 54.4 to 56.3

PMI Manufacturing

Consensus Forecast: 53.4

Consensus Range: 52.0 to 54.7

PMI Services

Consensus Forecast: 56.0

Consensus Range: 53.1 to 56.5

Acceleration for services and slowing for manufacturing was February's theme and steady strength for the former and modest re-acceleration for the latter are the expectations for March. The consensus for March's flash PMI composite is 55.2 split between a services consensus at 56.0 and a manufacturing consensus at 53.4.

Existing Home Sales for February

Consensus Forecast, Annualized Rate: 5.080 million

Consensus Range: 4.990 to 5.300 million

Despite falling mortgage rates and an easy comparison against a very weak December, existing home sales in January failed to post a gain and fell sharply to a three-year low annualized rate of 4.940 million. Econoday's consensus for February existing home sales is a 5.080 million annualized rate.

Wholesale Inventories for January

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.1% to 0.1%

Wholesale inventories have been building suddenly and sharply especially relative to sales, and a much slower build is the expectation for January. Forecasters see wholesale inventories increasing 0.1 percent in the month after rising 1.1 percent in December.

Treasury Budget for February

Consensus Forecast: -$227.0 billion

Consensus Range: -$229.0 billion to -$225.0 billion

January's surplus of $8.7 billion was very close to consensus but it didn't make much of a dent in the fiscal year-to-date deficit, at $310.3 billion and 77 percent deeper than the same time in the prior fiscal year. Econoday's February consensus for the Treasury Budget is a deficit of $227.0 billion that would compare with a $215.2 billion deficit in February last year.