Lots to worry about this week

Economic data, an FOMC meeting and a Treasury refunding announcement will make for an interesting week.  Already today we saw that the Fed’s favorite inflation gauge, the core PCE deflator, is now at 1.9% YOY, practically at the Fed’s target.  The FOMC statement on Wednesday might have a sentence that acknowledges the recent movement of inflation into or very close to the target range.  That would probably increase the odds of three more rate increases this year.  This is a meeting in which the Committee typically keeps the rate unchanged.  The press release, however, could remind the bond market not to get complacent over the outlook for monetary policy.

The Treasury will also remind the markets that their cash needs will be substantial after this quarter.  April 15 always brings a big cash inflow, keeping financing needs manageable this quarter.  But, with spending about to ramp higher, the cash needs will almost certainly require sizable increases to the note and bond auctions during the second half.  Some of those details might be discussed on Wednesday when the Treasury releases the auction schedule for next week’s refunding.

The first days of the new month always include the release of the ISM manufacturing index and the monthly employment report.  The ISM index has been well into growth territory (some would say boom territory) and should stay there tomorrow.  It has been a long time since we cared about the supplier deliveries component of this index, but now it is warning that companies are having difficulty filling orders.  Delivery times have been increasing in recent months, as have prices paid.  If, on Friday, employment increases close to 200,000 and average hourly earnings register another solid gain, that report together with the ISM index would give the FOMC ample justification for three, not two, rate increases in 2018.


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