Readings on the housing market, inflation and minutes of the Federal Reserve’s recent meeting highlight the week’s economic news.
A bevy of economic reports awaits investors and economists in a holiday-shortened week as the government gives updates on a key inflation measure and fourth quarter gross domestic product as well as private readings on the state of the housing market.
The releases of data, mostly for January, come against a backdrop of an economy that has been running hotter than expected and inflation that while trending downward still is running well above the level the Federal Reserve believes is needed.
The Fed’s thinking will be aired on Wednesday when the minutes of its most recent meeting will be released. Analysts expect it will show a healthy debate among officials over whether the recent downshift to a 25-basis-point hike was enough or if some favored a more aggressive half-point increase.
“The decision to raise the federal funds rate at the last meeting was apparently not unanimous,” Sam Bullard, managing director and senior economist at Wells Fargo, wrote on Monday, so policy watchers will closely monitor any discussion on the disagreement.”
Goldman Sachs and other top Wall Street firms are now talking about three more rate hikes as the Fed raises interest rates another 75 basis points, a more hawkish estimate than the two rate hikes the market had priced in recently.
“In light of the stronger growth and firmer inflation news, we are adding a 25bp (basis points) rate hike in June to our Fed forecast, for a peak funds rate of 5.25%-5.5%,” Goldman Sachs economists led by Jan Hatzius said in a note late last week.
The revised thinking has pushed yields on government bonds to the highest levels since 2007 and further fueled the debate over whether the economy can achieve the desired “soft landing” or whether a recession is inevitable.
Already, a sharp downturn has occurred in the housing and manufacturing sectors, while the tech industry is undergoing a wave of layoff announcements. The week will see two reports on housing, with Tuesday’s existing home sales data and Friday’s new home sales. Economists are predicting a small increase in existing homes, while new home sales are expected to show a decline month to month.
Thursday brings an update to the forecast for fourth quarter growth in GDP, pegged to register no change to the earlier estimate of 2.9% growth. Economic growth has been better than anticipated and the Federal Reserve Bank of Atlanta’s GDP Now model is forecasting 2.5% growth for the first quarter of this year.
A lot of focus will be on Friday’s report on personal consumption, including an index of pricing that is closely monitored by the Fed. The price index for January is forecast to show a monthly increase in the inflation number to 0.4% with a drop in the annualized rate to 4.3% from December’s 4.4%.
The inflation picture is clouded as year-over-year inflation is coming down, aided by a reduction in the price of many goods, but the month-to-month comparisons have been going up as the sharp decline in gasoline prices late last year has reversed a little. The Fed is especially focused on inflation in the services sector of the economy, where people spending more money eating out, getting haircuts and visiting the doctor have pushed prices and wages for service workers higher.
Looming over all the forecasts will be geopolitical developments, with the stunning cloak-and-dagger visit to Ukraine by President Joe Biden on Monday and Vladimir Putin’s bellicose speech to the Russian people Tuesday. China’s reopening of its economy post-COVID and its cozying up to Russia have also affected the markets as they contemplate stronger global economic growth but a more unsettled global security environment.
Last but not least is the internal dynamics of the stock market where gains in the S&P 500 have brought the index to a 14% rebound off its lows of last fall, prompting some analysts to warn of a retreat if inflation numbers and bond yields surprise to the upside.
“Markets are continuing to process economic data through the lens of ‘this will produce a more hawkish Fed’ and ‘higher for longer rates’, but the market is missing the point that a strong economy and normalization of rates after an abnormal decade of zero interest rates is a long-term positive, because it’s a signal of a healthier economy that isn’t in need of stimulus,” Carol Schleif, chief investment officer, BMO Family Office, said Tuesday morning.