The Market Today

Data Point to Acceleration in Growth and Inflation in March


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Home Sales, Consumer Confidence, and Fedspeak: The Pending Home Sales report for the month of February is expected to show a 1.0% increase (9:00 a.m. CT).  The University of Michigan’s final Consumer Confidence report for March (9:00 a.m.) is expected to be revised even lower, already having disappointed expectations in the first release by dropping to a new low for the cycle.  Inflation has become the primary concern in many of the sentiment indicators (see chart below).  There are also several Fed officials on the calendar today including New York Bank President Williams speaks (9:00 a.m.), Richmond’s Barkin (10:30 a.m.), and Fed Governor Waller (11:00 a.m.).


OTHER ECONOMIC NEWS

March PMIs Beat Expectations, Reflecting Strong Demand and Persistent Inflation Pressures: The S&P Global Manufacturing PMI, previously released as the Markit PMIs prior to a merger, rose from 57.3 to 58.5, better than the 56.6 expected and the highest since September. The Services PMI rose even more strongly from 56.5 to 58.9, topping expectations for 56.0 and the strongest since July. Combined, the surprisingly positive results lifted the composite PMI from 55.9 to 58.5, easily clearing the 54.7 expected and the fastest expansion since last summer. The report noted a “marked rise in new orders” and a “sharp expansion in [production] activity [that] was broad-based and signaled a further recovery from January’s Omicron-induced slowdown.” Employment gains were the strongest since April 2021 and supply bottlenecks were the lowest in 14 months. Despite those improvements and reinforcing the healthy pace of demand, orders backlogs rose at an “unprecedented” pace and inflation metrics remained elevated and a “significant theme in March.” Partially countering the upbeat tone throughout most of the report, the outlook cooled to a five-month low on elevated uncertainties, including the war in Ukraine, shifting central bank policy, and the historic inflation pressures.

Kansas City Fed Manufacturing Index Jumps Unexpectedly to a Record: The Kansas City Fed’s Manufacturing Activity index rose unexpectedly in March from 29 to 37, a new record in data since 2001. Employment softened but production and shipments soared to new highs in data back to the early 1990s and new orders inched up to the strongest reading since last May. Raw materials inventories improved to a record high despite prices for those materials also spiking to a new all-time high. Notably, supplier delays jumped back to a record-high level after several months of improvement. The forward-looking indicators told a similar story, with activity and inflation expected to strengthen further and supplier delays expected to continue.

Fed’s Evans “Comfortable” with 0.25%, “Open” to 0.50%: Chicago Fed President Evans said Thursday that his “own viewpoint is in line with the median assessment” in the March dot plot reflecting six additional quarter-point hikes this year. Answering a question after his speech, Evans said he’s “comfortable” with raising the target range in such increments at each meeting but open to the possibility of a 0.50% hike if he determines it is warranted. “With all of the uncertainty we face today, policymakers need to be cautious, humble, and nimble as we navigate the course ahead,” Evans said, adding “Monetary policy is not on a preset course: Each meeting’s decision will be based on an assessment of economic and financial conditions at the time.”

Fed’s Waller Wonders if Traditional Inflation Data Fully Capture Rent Increases: Fed Governor Waller used his current struggles in finding a home in the nation’s capital as anecdotal confirmation of a “red-hot housing market,” a dynamic he expects will continue. Waller said in a housing-centric speech that he believes rising home prices, while more rapid than even in the lead up to the housing crisis, are a reflection of supply-and-demand imbalances as opposed to “excessive leverage” and, therefore, pose less of a financial stability risk. Interestingly, Waller questioned whether traditional inflation metrics accurately reflect the extent to which rents have risen during the pandemic. “Based on various measures of asking rents, some recent research suggests that the rate of rent inflation in the CPI will double in 2022. If so, rent as a component of inflation will accelerate, which has implications for monetary policy.”


TRADING ACTIVITY

Treasury Curve Steepened Higher as Stocks Rebounded to Extend Recent Run: Stocks rebounded Thursday and the Treasury curve steepened higher as oil prices pulled back and a host of economic reports beat economists’ expectations. Despite disappointing data on durable goods orders, national PMI data reflected an unexpected resiliency for the U.S. economy in early March and jobless claims fell more than expected to their lowest level since 1969. The positive signals for U.S. economic fundamentals set a firmer base under stocks, helping to push the major indices steadily higher throughout the day. The S&P 500 closed up 1.4% and at session highs. Tech companies led gains across all sectors, with particular strength noted in semi-conductor names. Nvidia Corporation was the S&P 500’s top performer after the company announced it was investing in expanding its business, including the design of new chips, sparking a rally across the sector. Tech’s bounce pushed the Nasdaq up 1.9%, outpacing the S&P 500 which itself bettered the Dow’s 1.0% jump. Treasury yields fluctuated higher throughout the day and the shape of the curve alternated between steepening and flattening trades. By the close, the 2-year yield had risen 3.6 bps to 2.13% and the 10-year yield had gained 7.5 bps to 2.37%, the 22 bps of spread between the two marking a five-day high.

U.S. equity futures pointed to further gains for the major indices Friday which would cement a second consecutive weekly gain, despite the ongoing war in Ukraine and expectations for the Fed to be more aggressive in tightening policy. Futures on the big three were up by around 0.3% on average around 7 a.m. CT after mixed Asian trading and modest gains in Europe. Data yesterday showed the U.S. economy performed resiliently early this month notwithstanding the growing risks to the recovery, although today’s consumer confidence report (revision) is a reminder of the uncertain path ahead (more above). Data released earlier showed German businesses’ assessment of the current climate tumbled more than expected to the weakest level since July 2020. The expectations component of the survey plunged past estimates to its weakest reading since May 2020. Reversing the prior day’s trend for a fourth time this week, the Treasury curve was flattening at 7:30 a.m. and the 2-year 10-year spread had fallen back below 20 bps. The 2-year yield was 2.4 bps higher to 2.16% while the 10-year yield had drifted 1.1 bps lower to 2.36%.


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