The Market Today

Retail Sales Slow after January Surge; Fed’s Highly Anticipated Decision on Deck


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Mortgage Applications: Mortgage applications fell 1.2% in the week ended March 11 after jumping 8.5% in the week prior. Despite the MBA’s 30-year fixed rate climbing 0.18% to 4.27%, the highest level since May 2019, purchase applications tagged a modest 0.7% gain onto the prior week’s 8.6% jump. Refinance applications, however, pulled back 2.8% following an 8.5% gain.

Volatile Retail Sales Show February Slowdown after Stronger-Than-Estimated Surge in January: Retail sales have been volatile to start the year, slowing more than expected in February following a big jump in January that was even stronger than initially estimated. Total retail sales rose 0.3% last month, short of expectations for a 0.4% gain but still solid considering January’s 3.8% surge was revised up to 4.9%. Excluding the volatility early in the pandemic and months associated with stimulus payments, January’s gain marks the second strongest on record. Sector level spending results were split. The biggest gain occurred in sales at gasoline stations, with the 5.3% monthly increase occurring even before the lion’s share of the surge in pump prices across the country. Higher fuel costs are likely to absorb an even greater share of disposable income and weigh more heavily in next month’s report. Stripping out the fuel gains, an 0.8% increase in auto sales, a 0.9% improvement in building material sales, and a 2.5% recovery for restaurant spending, activity at the control group, which feeds GDP, fell 1.2% in February. The decline disappointed expectations for a 0.3% gain but came on the heels of January spike that was revised up from 4.8% to 6.7% (the strongest in pre-pandemic history) and primarily reflected reversions for categories that previously posted unusually strong gains. Notably, online sales fell 3.7% in February after soaring 20.6% in January. When analyzing the impact on real economic growth, it’s important to remember the retail sales data is a nominal series that must be adjusted lower for changes in prices. Averaging through the monthly noise, spending in the first quarter appears solid thanks to a January jump with momentum slowing in February.

Inventories and Home Builder Confidence: At 9 a.m. CT, business inventories data will be released alongside the NAHB’s Housing Market Index, which is expected to show a small decline in builder confidence in early March.


FED DECISION

The Fed is widely expected to raise rates later this afternoon for the first time since 2018. The uncertainty caused by the U.S.-China trade war led the Fed to cut rates three times in 2019, from 2.50% to 1.75%, before the COVID-19 pandemic forced rates all the way to a range of 0.00% to 0.25%. With historic fiscal support buoying demand in an unexpectedly strong manner and a weakened global supply chain unable to keep up, inflation has accelerated to the fastest rates since the early 1980s. Reflecting the market’s concern the Fed could be behind the inflation curve, futures are priced for the most aggressive tightening, relative to the broader rate environment, on record (see Chart of the Day).

What to Watch For

The Statement: The Statement may make mention of the war in Ukraine and wording around inflation could be adjusted. The Committee might also include some indication about the forward path for interest rates but may save any signaling for the infamous dot plot. At the very bottom of the document, the vote tally will show whether the 25-bps hike was a unanimous decision or if some of the more hawkish FOMC members dissented in favor of a larger rate increase.

New Economic Forecasts: The economic projections should show a higher trendline for inflation which will necessarily weigh on the outlook for real economic growth. The forecast for higher inflation should also result in a steeper path for liftoff and quicker pace of tightening in 2022.

An Updated Dot Plot: December’s median projection showed three hikes in 2022, three hikes in 2023, and two hikes in 2024, leaving policy in an accommodative position relative to the longer run neutral rate estimate of 2.50%. Hawks and doves alike have indicated support for raising rates at a quicker clip than they had expected as inflation pressures have broadened out, not begun to moderate as officials had hoped. Economists’ expectations for rate hikes this year have coalesced around a range between five and seven moves. Additional tightening plans in the out years will show how many on the Committee believe policy may need to become restrictive (i.e. above neutral) to contain inflation.

Powell’s Press Conference: In his Senate testimony earlier this month, Chair Powell said the war in Ukraine could impact the economy in “unexpected ways” and pledged to monitor ongoing developments. However, he stressed that the labor market is “extremely tight” and acknowledged that inflation “is now running well above” target. Therefore, he said he was “inclined to propose and support a 25-basis point rate hike” today, effectively quashing the risk of a 50-bp increase at this meeting. However, he also noted that “we would be prepared to move more aggressively, by raising the federal funds rate by more than 25 basis points at a meeting or meetings,” if inflation doesn’t begin to moderate. Any discussion of the forward path above and beyond what the dot plot shows would likely trigger a market response. Additionally, investors will be keen to learn what progress was made towards a concrete plan to begin shrinking the balance sheet.


OTHER ECONOMIC NEWS

Raskin Withdraws from Consideration to Be Fed’s Next Vice Chair of Supervision: Sarah Bloom Raskin withdrew from consideration for the position of Fed Vice Chair of Supervision Tuesday. Republicans in the evenly divided Senate had objected to her appointment due to previous comments she made that led conservatives to believe she might use her position to push a more left-leaning agenda, particularly as it relates to the energy industry. Democratic Senator Manchin, a necessary vote if Raskin was to be approved, cited similar concerns in public comments Monday indicating he also would vote “no.” While the development will leave the position vacant for now, it may allow other pending appointments, held up as part of the objections to Ms. Raskin, to now be approved. Powell’s second term as Fed Chair and Governor Brainard’s promotion to Vice Chair are expected to receive sufficient support, as are the nominations of Lisa Cook and Philip Jefferson for the two additional vacancies on the Fed’s Board of Governors.


TRADING ACTIVITY

Stocks Rebound Nicely Despite Continued Upward Yield Pressure As Oil Extends Sell-Off: Stocks rebounded aggressively Tuesday even as upward bias for Treasury yields remerged throughout the day following overnight declines. After surging Monday, Treasury yields fell to session lows early in U.S. trading as oil’s recent decline gained steam and after softer-than-expected readings on manufacturing in the NY Fed District and producer price inflation. U.S. WTI closed down more than 6% and below $97 per barrel, marking a 26% decline from last Monday’s high above $130. Reflecting the favorable implications of oil’s decline for inflation, fed funds futures had drifted lower away from their steepest levels of the cycle before reversing to end little changed. By the close, futures continued to price in a 25-bps rate hike at today’s meeting and the equivalent of six additional quarter-point hikes by the end of the year. After falling as low as 1.79% early in the U.S. session, the 2-year yield ended down just 1.2 bps at 1.85%. The 10-year yield rose 1.1 bps to 2.14%, fully erasing an earlier drop to 2.07% and closing at the highest level since June 2019. The 5-year yield rose 1.5 bps to 2.11%, a new high back to May 2019. Although energy companies weighed heavily on the S&P 500, every other sector strengthened to lift the broader index 2.1%, splitting the Dow’s 1.8% gain and the Nasdaq’s 2.9% rally.

A sharp recovery in Asian equities following a steep sell-off to start the week has helped lift risk sentiment more broadly as investors turn their attention to today’s Fed decision. The MSCI Asia Pacific Index jumped more than 3% Wednesday, supported by a pledge from top Chinese officials to “actively introduce policies that benefit markets.” Stocks linked to China have been bludgeoned in recent days by developments on multiple front, including a new outbreak of the virus that has led to severe lockdowns. The positive push filtered into European trading and gained steam on a remark from Russia’s Kremlin that a militarized but neutral Ukraine “could be viewed as a certain kind of compromise.” Europe’s Stoxx 600 was 2.8% higher at 6:45 a.m. CT and sovereign yields curves were near their session peaks. Germany’s yields had gained between 5 bps and 7 bps across the curve. Ahead of this morning’s retail sales data, U.S. equity index futures were 1.1% to 1.8% higher and the Treasury curve was higher. The 2-year yield rose 0.9 bps to 1.86% while the 10-year yield added 1.8 bps to 2.16%.


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