On tap: February new home sales, durable goods, and personal income figures, and March consumer sentiment readingsThe financial markets are betting a softer economy, led by housing, will push the Federal Reserve to cut interest rates back to 4.75% (from 5.25%) by the end of the year. Yet, even though the central bank acknowledged weaker conditions, its Mar. 21 monetary policy meeting press release stated "the predominant policy concern remains the risk that inflation will fail to moderate as expected." So are investors overestimating the potential impact from housing, or will the Fed have to make a sudden shift in its stance and cut interest rates?
From the Fed's perspective, personal income, consumer spending, and inflation aren't giving much ground. Economists expect the February personal income and outlays report to show more of the same: decent growth in income and spending. On the final page of the report, take a look at the personal consumption expenditures price index. This is the preferred inflation measure of the Fed. It showed a yearly growth rate of 2.7% in January, and 2.3% when food and energy were excluded. Both remain above the Fed's 1% to 2% comfort level. And even though the March consumer confidence figures are expected to wilt a little, those results haven't correlated well with spending of late.
Meanwhile, investors are focusing on weak results such as those in manufacturing. The February rebound in factory output provided a glimmer of hope, but that will be put to the test with the February durable goods reports. A rebound is anticipated after a dreadful January report. The key is whether businesses remain cautious. If they are, it will show up in the orders data for capital goods minus aircraft and defense equipment.
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