Introduction

The economic data was definitely not nearly as soft as indicated by the week's major inflow into the Treasury market. It's not every week that the 10-year yield, now at 2.44 percent, falls 15 basis points. This move began at mid-week when the Federal Reserve, in the highlight of its very dovish policy meeting, announced an end to quantitative tightening and will, beginning in September, resume full reinvestment of maturing issues. But the size and building pace of the move into bonds, combined with the week's 1.3 percent sell-off in the Dow, could be interpreted as a signal of expected economic trouble. But the week's actual economic news isn't that bad. So the PMI slowed a bit? So the PMIs in Europe slowed a bit more? These reports are based on small samples and employ less-than-robust methodology. In any case, let's begin our data run down with some good news to remind us that the U.S. economy, despite rough conditions and headwinds, hasn't actually sprung a leak.

The economy

The good news begins with what was the weakest of all sectors in the 2018 economy, that is housing. And microscopes and averages aren't needed to find the good news in February existing home sales, jumping 11.8 percent to a 5.510 million annual rate. This topped Econoday's consensus range which was on the climb late in the week after separate indications from the West, where prior sales were hit by wild fires, began pointing to a rebound for the region. And a rebound is what we got as sales of existing homes shot 16.0 percent higher in the West though the South and Midwest also posted strong gains, up 14.9 percent and 9.5 percent respectively. Single-family resales, up 13.3 percent to a 4.940 million rate, were especially strong during February which is especially good news for the housing sector in general. Averages, nevertheless, are necessary when evaluating housing because the data, due in part to small sample sizes, seem to be always very volatile. The 3-month average for existing home sales did pop higher, to a 5.147 million rate as tracked by the blue line in the graph and the first increase for this reading since April last year. Data on new home sales, updated for January in the prior week, have been on a better climb and, together with February's resale data, should ease pessimism in a sector that was last year's big disappointment.

Gains for new home sales have been helping home builder sentiment recover from the plunge that swept the housing market index sharply lower late last year. But the index, as tracked in the red line, didn't move any higher in the March report, holding unchanged at 62 despite solid gains for both present sales (dark blue line) and 6-month sales (green line). Holding back the index was once again traffic (light blue line), falling 4 points to a dismal looking 44. This underscores growing concern in the housing sector that sales are increasingly being driven by high-end buyers while other buyers and especially first-time buyers do not appear to be showing much interest. But mortgage rates were already coming down sharply and will be coming down even more sharply following the week's stampede into the bond market. Going into this week's move, rates were already at their lowest level in a year with the average 30-year conforming loan ($484,350 or less) at 4.55 percent . Still, slopes for these readings had been slumping though the recent upticks are definitely a reason for optimism.

Not a reason for optimism at all, however, is the latest signal from the wholesaler sector. There are few indications of economic slowing that are more convincing than an unwanted build in inventories – and that apparently is what wholesalers are struggling with right now. Wholesale inventories jumped 1.2 percent in January to far exceed anyone's expectations and were up a year-on-year 7.7 percent. Confirmation that this is unwanted comes from sales in the sector which did rise 0.5 percent in January but follow a long stretch of contraction. Sales year-on-year are up only 2.7 percent. And the sector's stock-to-sales ratio continues to climb, at 1.34 vs 1.33 in December and against 1.28 in January last year. Neither housing nor inventories have caught much attention at the Federal Reserve where policy makers instead have been focusing on the risks to consumer spending and also what the global slowdown is doing to manufacturing. But wholesalers are right in the middle of these sectors and the signal being sent is that there may too many goods right now in the supply chain.

Now we're going to sneak the word "recession" into our discussion. If we are facing such a risk, and that may be what the markets are signaling right now, it's first effects are coming from offshore. Factory orders slowed into year-end and didn't show any momentum in January, up only 0.1 percent to do no better than match December's marginal rate of growth. In fact, as seen in the graph, orders have been struggling at the monthly $500 billion level the past four months. And this isn't due to a collapse in aircraft orders which in fact have actually climbed the last three reports and solidly so. Vehicle orders also have been climbing which is a set-up for weak results in a core reading of this report, ex-transportation which contracted 0.2 percent in January after contracting 0.5 percent and 1.3 percent in December and November. Capital goods, another core reading, tailed off badly late last year though it did bounce back with strength in January. But the gist of the factory orders report isn't about strength at all reflected in a 0.4 percent decline in overall shipments and what, given what's going on with wholesalers, looks suspiciously like an unwanted build in inventories, up 0.5 percent in January. Unfilled orders are also not pointing to strength, inching 0.1 percent higher after declining 0.1 and 0.2 percent in the two prior months. For the U.S. economy, it's the factory sector that's in the trenches facing the global economy where demand has been generally soft and cross-border trade on the defensive.

More current information on manufacturing, though of a less definitive kind, comes from diffusion indexes among private and regional surveys. These have mostly been moderating including the March flash of the manufacturing PMI report which at 52.5 missed expectations and posted its lowest rate of indicative growth in nearly two years. New orders for this sample are showing the weakest monthly growth since April 2017 with hiring in the sample now the softest since June 2017. None of this is helping the sample's optimism which is the weakest since June 2016. Doing better than manufacturing and helping to offset its effects on overall growth is services with this PMI also slowing this month but still coming in at a very healthy 54.8. But for Federal Reserve officials, it's the manufacturing sector that gets the most attention and is traditionally considered a bellwether for overall economic pivots. Neither of these PMIs, which got a lot of attention in Friday's markets, will be increasing forecasts for the upcoming ISM manufacturing and non-manufacturing reports both of which have been showing their own pullbacks in recent months.

One area of consistent strength for the economy has been, or at least was, the labor market, that is before the paltry 20,000 gain in February nonfarm payrolls. That result was way out of kilter compared to trend and stands in contrast, or at least in some contrast, to jobless claims which have shown less volatility. The March 16 week was the sample week for the March employment report and initial jobless claims in the week are hinting at a bounce back for March payrolls. Claims fell 9,000 in the week to 221,000 with the 4-week average, as tracked by the blue line of the graph, at 225,000 and down a sizable 11,000 from the prior mid-February sample week. This is good news. Continuing claims, where data lag by a week, are also generally pointing to labor market strength, down 27,000 to 1.750 million in the March 9 week for the best showing since early February. This 4-week average, at 1.773 million, was up in the week but only slightly while the unemployment rate for insured workers held at a very low 1.2 percent. Nevertheless, even though levels of claims are still near historic lows, there's no doubt that they have been bumping higher since October.

One reason for the Fed's dovish turn, which this last week included shelving any more rate hikes for now and also shaving its GDP forecasts, is a lack of fiscal stimulus which last year, headlined by corporate and individual tax cuts, gave a sizable demand boost to the economy. But for this year, it's pay back time as the government's deficit has deepened and continues to deepen dramatically. In the first five months into the government's fiscal year, the red ink totaled a whopping $544.2 billion. This is 39.2 percent deeper than at the same time in the prior fiscal year ($391.0 billion) and 55.2 percent deeper than the same time the year before that ($350.6 billion). The big tax cuts according to many of their proponents were supposed to drive up tax revenue in a cause-and-effect arrangement called "dynamic scoring". So far this fiscal year, individual tax receipts are down, not up, 3.3 percent lower at $626.6 billion with corporate tax receipts definitely down, 19.5 percent lower at $59.2 billion. At least one positive of the down move in Treasury yields will be less funding pressure for the Treasury though net interest, that is the expense the government pays to fund the growing deficit, is already up 15.8 percent so far in fiscal 2019 to $153.6 billion. Other increases in outlays include a 14.4 percent fiscal year-to-date jump in Medicare, to $256.5 billion, and an 11.1 percent rise in defense to $297.7 billion. If the economy does begin to falter, counter-cyclical fire power will apparently have to be concentrated fully on the monetary side.

Markets: Will we look back and say we were already in recession?

Joining the 15 basis point drop for the 10-year was the 2-year Treasury yield, falling 12 basis points to 2.32 percent and now only 12 basis points from meeting the 10-year. The graph tracks these two yields over time and when they meet, recessions for whatever reason often ensue. Year-to-date, the 10-year yield is down 24 basis points with the 2-year losing its separation with only an 18 basis point decline. The stock market is still up strongly so far this year, at 9.3 percent for the Dow though the week's 1.3 percent does offer an unwanted reminder of this time last year when double-digit gains for the stock market started rattling apart. The dollar has been very well behaved so far this year, unchanged in the week on the dollar index and up only 0.5 percent since year end. Actually the dollar is hardly in the news at all this year, not blamed for any cross-border trade issues and conveniently upstaged by extreme volatility in the pound amid the Brexit perplexity. When we look back at the 2019 markets, this week will be of special note.

The bottom line

Whether Brexit or rough spots in the U.S.-China trade talks not to mention some unfavorable economic signals like the February employment report, many reasons thus combine for the rise in turbulence. Looking at the latest economics, the extending surge in wholesale inventories is one reason for caution as are the less-than-favorable signals coming out of the factory sector. But one reason for optimism is the possible rebound underway for home sales and with mortgage rates coming down, greater strength for housing would be no surprise. Yes the week's financial markets got pelted from every side yet one side where the pain is least is perhaps the most important – economic fundamentals which barring a second collapse in the March employment report may be rough but appear stable enough.

Week of March 25 to March 29

A heavy week of data are in store and the national accounts are the theme. A major component for first-quarter GDP –  long-delayed data on January consumer spending – will be posted on Friday and is expected to show a modest but still constructive 0.3 percent gain in the wake of December's deep rout. Fourth-quarter GDP will be Thursday's focus and a downward revision is the forecast, from 2.6 percent to 2.2 percent, while on Wednesday the nation's fourth-quarter current account will be under the spotlight with the consensus calling for extending deterioration to a shortfall of $132.1 billion. The nation's trade deficit for January will also be posted on Wednesday and only moderate improvement from a very deep December deficit is expected. January's trade results will have a direct bearing on first-quarter GDP as will Tuesday's housing starts data and Friday's report on new home sales, both for February. Housing has not been a major focus yet of the Federal Reserve despite concern over economic slowing, and slowing has been the clear and unwanted theme for home prices. Neither Case-Shiller's 20-city index nor the FHFA's house price index are expected to show much improvement in their separate reports on Tuesday. Should the week's data generally fall in line with expectations, concerns over economic slowing are not likely to ease.

Monday

National Activity Index for February

Consensus Forecast: 0.10

Consensus Range: -0.20 to 0.30

Forecasters see the national activity index swinging back to a consensus plus 0.10 after falling unexpectedly to minus 0.43 percent in January on a downswing in manufacturing production especially autos. Apart from monthly swings, the 3-month average for this index has been steady, at a moderate and favorable 0.16 in both January and December.

Dallas Fed General Activity Index for March

Consensus Forecast: 10.0

Consensus Range: 5.0 to 13.5

March's consensus for the Dallas general activity is 10.0 vs what was a higher-than-expected 13.1 in February, a gain that reversed two prior months of sharp slowing for this index.

Tuesday

Housing Starts for February

Consensus Forecast, Annualized Rate: 1.201 million

Consensus Range: 1.141 to 1.250 million

Building Permits

Consensus Forecast: 1.300 million

Consensus Range: 1.290 to 1.320 million

Flat are the forecasts for housing starts and permits in February. Starts, which bounced back strongly in January to a 1.230 million rate after a steep December drop, are expected to come in at a 1.201 million pace in February. The consensus for permits is 1.300 million vs January's 1.317 million (revised from an initial 1.345 million).

Case-Shiller, 20-City Adjusted Index for January

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.0% to 0.3%

Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Month-to-Month Change: 0.0%

Consensus Range: -0.1% to 0.4%

Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Year-on-Year Change: 4.2%

Consensus Range: 3.8% to 4.5%

The Case-Shiller's 20-city adjusted index is expected to rise a monthly 0.3 percent in January vs what was a much lower-than-expected increase of 0.2 percent in December. An extending slump for West Coast cities has been pulling down the index which in December showed total year-on-year growth of only 4.2 percent, the lowest reading since November 2014 and again sharply lower than expected. Consensus for January's yearly rate is no change at 4.2 percent. Forecasters also track the monthly unadjusted rate for the 20-city index which they see unchanged in January after December's 0.2 percent decrease.

FHFA House Price Index for January

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.4%

Modest growth is what forecasters see for the FHFA house price index in January, at a consensus gain of 0.3 percent vs what was a lower-than-expected rise of 0.3 percent in December. The year-on-year rate of 5.6 percent in December was the lowest since February 2016.

Consumer Confidence Index for March

Consensus Forecast: 132.5

Consensus Range: 130.0 to 134.4

The reopening of the government gave the consumer confidence index the lift in February that the shutdown had pulled down in January. February's 10-point gain was unexpectedly large and included a very favorable 11.8 percent jobs-hard-to-get reading that, however, was not consistent at all with what turned out to be a plunge in payroll growth. Econoday's consensus for March is 132.5 vs February's 131.4.

Richmond Fed Manufacturing Index for March

Consensus Forecast: 11

Consensus Range: 10 to 15 

A jump in new orders led a strong bounce back for February's index which at 16 easily beat Econoday's high estimate. The March consensus for Richmond is less heated growth at 11.

Wednesday

Current Account Deficit for Fourth Quarter

Consensus Forecast: -$132.1 billion

Consensus Range: -$136.0 to -$124.3 billion

Reflecting further weakening in the nation's net exports, the current account deficit is expected to deepen to a consensus $132.1 billion in the fourth quarter vs $124.8 billion in the third quarter.

International Trade Balance for January

Consensus Forecast: -$57.4 billion

Consensus Range: -$60.0 to -$55.0 billion

After a sharp and unexpected deepening in December to $59.8 billion, forecasters see moderate improvement for January's international trade balance where the consensus deficit is $57.4 billion.

Thursday

Real GDP: 4th Quarter, Final Estimate, Annualized Rate

Consensus Forecast: 2.2%

Consensus Range: 1.8% to 2.7%

Real Consumer Spending, Annualized Rate

Consensus Forecast: 2.5%

Consensus Range: 2.4% to 2.6%

GDP Price Index

Consensus Forecast: 1.8%

Consensus Range: 1.8% to 1.8%

Reflecting downward revisions to a range of components especially services spending, the consensus for the final estimate of fourth-quarter GDP is 2.2 percent compared to 2.6 percent in the prior estimate. Consumer spending rose at a solid 2.8 percent pace in the prior estimate and 2.5 percent is the call for the revision. The GDP price index is unanimously seen at 1.8 percent, unchanged from the first estimate.

Initial Jobless Claims for March 23 week

Consensus Forecast: 225,000

Consensus Range: 224,000 to 230,000

Initial jobless claims have been steady in a narrow range between 220,000 to 230,000 and are expected to come in at 225,000 in the March 23 week. Initial claims were at 221,000 in the March 16 week.

Pending Home Sales Index for February

Consensus Forecast, Month-to-Month Change: -1.0%

Consensus Range: -3.0% to 3.2%

A turn back lower is the forecast for February pending home sales which are expected to decrease 1.0 percent after surging an outsized 4.6 percent in January. Despite January's jump, pending sales were still down a year-on-year 2.3 percent though this was less steep than the 8.5 percent decline for final resales in January.

Friday

Personal Income for February

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.1% to 0.4%

Consumer Spending for January

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: -0.2% to 0.7%

PCE Price Index for January

Consensus Forecast, Month-to-Month Change: 0.0%

Consensus Range: 0.0% to 0.1%

PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.4%

Consensus Range: 1.4% to 1.7%

Core PCE Price Index

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.2%

Core PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.9%

Consensus Range: 1.8% to 2.0%

Personal income is seen rising a moderate 0.3 percent in February vs a dip of 0.1 percent in January that, however, followed a 1.0 percent spike in December. The Bureau of Economic Analysis is still catching up from the government shutdown and will be releasing January data for consumer spending and the PCE price indexes, not February. Consumer spending for January is expected to rise 0.3 percent after falling 0.5 percent in December. The core PCE price index, which excludes both food and energy, is seen posting a 0.2 percent January rise for a year-on-year rate of 1.9 percent. The consensus for the overall PCE price index is no change for a year-on-year rate of 1.4 percent.

Chicago PMI for March

Consensus Forecast: 60.3

Consensus Range: 55.0 to 64.1

Limited slowing from a very high rate of growth is the call for the Chicago PMI with the March consensus at 60.3 vs 64.7 in February that was up 8 points and far exceeded even high expectations. Gains for both orders and backlogs were very strong in February.

Consumer Sentiment Index, Final March

Consensus Forecast: 97.8

Consensus Range: 97.5 to 97.9 

Econoday's consensus for the final consumer sentiment index for March is 97.8 which would be unchanged from the much better-than-expected jump in the month's preliminary reading. This index fell sharply during the government in January and has since recovered.

New Home Sales for February

Consensus Forecast, Annualized Rate: 616,000

Consensus Range: 600,000 to 635,000

New home sales hit expectations in January at a 607,000 annual rate with prior months revised higher and the 3-month average at its best level since June. Expectations for February are looking for further improvement, at a 616,000 rate.