EC Three Highlights In The Week Ahead

Three events next week will shape the investment climate.  The Federal Reserve meets and will update its forecasts and guidance. The British House of Commons may vote for a third time on the Withdrawal Bill before Prime Minister May heads of the EU Summit to ask for an extension of the UK leaving the EU. The eurozone sees the flash March PMI, with great hope that the green shoots of spring will be evident.

FOMC

There is little chance of a change in policy at the FOMC meeting.  The meeting is important because the Fed's verbal communication has changed dramatically since the December projections.  The Fed's thinking about its balance sheet has also evolved. Often officials make small incremental changes to their forecast, but it could be a step function this time.

That said, the Fed's view of the economy has probably not changed materially. The economy hit a soft patch at the end of last year and early this year as various crosscurrents hit, but the underlying fundamentals remain firm. Financial conditions tightened dramatically, but have eased nearly as quickly. The S&P 500 is up over 12% since the start of the year.  The Federal Reserves' real broad trade-weighted dollar index fell in both January and February, to snap an 11-month rally.  US interest rates remain below Q4 18 levels.  The 10-year note yield was near 3.25% in early November and finished last week below 2.60% for the first time since early January.  The two-year yield closed the week a little above 2.40%.  It peaked shy of 3.0% four months ago. 

In December, the median forecast for growth this year was shaved to 2.3% from 2.5%. The median dot for 2020 and 2021 was unrevised at 2.0% and 1.8% respectively.  Like many private sector economists, officials will likely recognize that the economic weakness in Q1 may be more pronounced than anticipated and could trim their forecasts again.

Growth forecasts need to be understood within the context of what is seen as the long-term prospects, which are understood as trend growth.  The range of forecasts in December was 1.7% to 2.2% (in September it was 1.7% to 2.1%), so the median projection at the end of last year was for a little more than trend growth. The new update will put it back into the range.  A forecast below the range would be understood as a dovish signal, of course, but the variable lag times, even projections of growth in the future years below the range of the long-term forecasts would impact the trajectory of policy.

Federal Reserve Chair Powell indicated that he would like to see inflation accelerate before resuming the tightening cycle.  In December, the median forecast for both the headline and core PCE deflator was pared to 0.1% to 1.9% and 2.0% respectively.  The 2020 and 2021 median headline forecast did not change.  It remained at 2.1% for both years, while the median core forecast was slipped 0.1% to 2.0% for both years.  Core inflation readings have been soft and market measures of inflation.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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