Given the mixed Q4 economic and corporate profitability results we received on Good Friday, this week’s data-centric calendar should provide investors with some context for the interest rate and economic landscape ahead. Last week’s tight trading range for equities, coupled with a clear contraction in volume has set this week up for some interesting pivot points. Further, Q1 earnings season does not commence for a week, making economic data that much more prominent.
This week will indeed be busy from an economic data stand point and it will be back loaded. International Trade in Goods, Personal Income and Outlays and the Pending Homes Sales Index on Monday. S&P Case-Shiller HPI and Consumer Confidence on Tuesday. The ADP and EIA Petroleum Status on Wednesday. Thursday, Weekly Jobless Claims and the Chicago PMI. Friday we receive a flurry of data; Motor Vehicle Sales, Employment Report, PMI Manufacturing, ISM Mfg., Consumer Sentiment, Construction Spending and rig counts. As if that wasn’t enough to digest, there are seven speeches planned by Federal Reserve officials. Without question, the most important talk will be given by Chair Yellen on Tuesday at the Economic Club of New York.
Is the Fed gambling that they may overshoot on inflation by keeping rates lower than might be dictated given the inevitability of the rate of inflation rising
Chair Yellen’s speech will likely cover both backward looking data; the US dollar, employment growth, GDP, inflation, crude oil, home buying activity and corporate profitability among other themes. Forward looking projections however are significantly more interesting as far as investors are concerned. To that end, by most measures, we are at or near full employment, though average hourly work week and the labor force participation rate have continued to languish. St. Louis Fed President James Bullard outlined as much in an interview on Bloomberg on Friday pointing out that he expected the official unemployment rate to drop to 4.5% by year end.
The principle point of contention for the Fed right now is inflation. Increasingly, data suggests that embers of inflation as framed by PMI, PPI and other readings including housing, are present. More importantly, crude oil is projected to act as a tailwind in respect to inflation over the coming quarters. Is the Fed gambling that they may overshoot on inflation by keeping rates lower than might be dictated given the inevitability of the rate of inflation rising – yes. The Fed would rather have to contain inflation than continually attempt to ignite it.