Week Ahead: The Potential to be a Downer

As I expected the Fed cut rates by 75bp. However, we did see Governor Plosser and Fisher dissent on the decision, both wanting smaller cuts. This is interesting news because I now believe we may be closer to the end of the current rate cut cycle than I originally thought. This may be good news for the Fed. Recently, there has been a lot of chatter in the markets over the US encountering a possible liquidity trap, like that in Japan. However, with the two dissentions on Tuesday’s vote markets are now pricing in a lower probability of more significant rate cuts at April’s meeting, meaning the Fed may have found a way to reduce or end the current rate cut cycle, before rates became low enough to invoke a liquidity trap, and importantly, without disappointing market expectations. You can see from the chart below that after Tuesday’s announcement market expectations shifted to a 2.00% fed funds rate vs. 1.50% prior to the announcement.

The Cleveland Fed's Implied Probabilities for the April meeting outcomes as shown that the magnitude of the expected rate change has declined significantly

Source: Cleveland Fed

This week has the potential to bring some negative consumer focused news to the market place. It is likely GDP will be revised downwards, housing numbers will continue to disappoint, and PCE will help convince a few more people a recession has arrived. We are not sure if the market will have enough upside momentum to keep up last week's gains through-out this week. For those of you looking at global markets, make sure you keep an eye on Taiwanese markets which are set to rally after the big victory of the ‘China friendly’ party in the country’s Presidential elections.

Let’s take a look at the some of the important indicators coming out this week in the US :

Monday March 24th:
10:00AM: Existing Home Sales (Risk: Downside) The Bloomberg consensus survey indicates the market is currently anticipating a reading of 4.85mn units, this would be slightly lower than last month’s 4.89mn reading. There hasn’t been much good news in any of the housing market indicators, and considering the difficulty in acquiring home loans I do not see much upside. We should continue to see inventories increase, and prices falling.

Tuesday March 25th: Fed Day!
10:00AM: Consumer Confidence (Risk: Neutral)- According to Bloomberg.com the market is currently expecting a reading of 73.0 vs. 75.0 last month. We have already seen a substantial drop in the confidence numbers and imagine it will stay around these levels for some time. Minor changes in the Consumer Confidence numbers are not overly important. However, what is important is large swings, such as the major drop we have experienced at the beginning of this year.

Wednesday March 26th:
8:30AM: Durable Goods Orders (Risk: Downside)- According to Bloomberg.com the market is currently expecting a reading of 0.7% m/m vs. -5.3% m/m previously. We have seen continued weakness in the manufacturing sector and imagine this weakness will be reflected in the durable goods number.

10:00AM: New Home Sales (Risk: Downside)- According to Bloomberg.com the market is currently expecting a reading of 575K vs. 588K previously. For the same reasons as Existing Home Sales outlined above.

Thursday March 27th:
8:30AM: GDP Final (Risk: Downside)- According to the consensus survey the market is expecting a reading of 0.6%q/q SAAR, or no change from the preliminary reading. However, I believe there could be more downside in this number than upside and thus believe there is a chance the number could somewhat disappoint.

8:30AM: Jobless Claims (Risk: Neutral)- According to the consensus survey the market is expecting a new jobless claims of 370K,vs. 378k last week. I still continue to monitor this release as one of the most important for the employment situation.

Friday March 28th:
8:30AM: Personal Income and Outlays (Risk: Downside)- According to the consensus survey the market is expecting 0.3%m/m and 0.1%m/m for personal income and personal outlays, respectively. Rising energy and food prices in February will likely eat into the consumer spending figures out pacing the rise in personal income. Remember, about 70% of US GDP is based on consumer spending.

10:00AM: Consumer Sentiment (Risk: Neutral)- According to the consensus survey the market is expecting a reading of 70.0 for consumer sentiment vs. 70.8 last month. After experiencing a large downward swing at the beginning of this year I expect sentiment to stay around this level for the time being.