"Data focus in the coming week will be on March inflation reports, with the PPI report due out Tuesday and CPI Wednesday. Obviously these have lost quite a bit of their significance relative to a month ago, when it was thought that upside surprises could lead to the Fed hiking 50 bp in May – which is presumably not a realistic possibility at this point regardless of the inflation news. However, the underlying acceleration in these figures might help slightly mitigate the market's newfound belief that an end to the rate hiking cycle is imminent. (What a manic-depressive episode that swing has represented over the last month!). Economic data may take a back seat to activity in other markets in coming days, however, with continued focus on stocks and corporate credit spreads and the growing sense of dread and pessimism the recent softness in these markets has engendered among investors.
In Fed news, the calendar of speakers is quite busy, including testimony on budget issues by Fed Chairman Greenspan on Thursday. The Beige Book prepared for the upcoming FOMC meeting will be released Wednesday. The last Beige Book reported widespread reports of increased business pricing power, a worrying development that a number of Fed officials have since noted in discussing inflation risks. Certainly, comments on the softening economic tone will also be watched for in the report. On the supply calendar, Treasury will announce a reopening of the 5-year TIPS on Thursday for auction the next Tuesday. We look for a $10 billion size. The first big post-April 15 tax receipts will start to be reported late in the week in the Daily Treasury Statement, and how these develop over the next few weeks will be a key determinant of the budget and financing outlook for the rest of the year (see the article “Tax Time” by Ted Wieseman for an overview of our expectations). In addition to the inflation reports, data releases due out include housing starts Tuesday and leading indicators and the Philly Fed survey Thursday:
* We look for a 0.6% rise in the headline PPI in March and a 0.2% increase in the core. Wholesale gasoline prices skyrocketed in March. And even though seasonal factors anticipate a rise at this time of year, we should still see a sizeable impact on the headline PPI. In fact, the gain in the overall energy category should far outstrip the 1.4% advance seen in February. Meanwhile, the core is expected to be reasonably well contained this month, with vehicle prices expected to flatten out following the gyrations seen in January and February.
* We expect March housing starts to fall 3%, to 2.12 million. Hours worked in the construction industry were about flat in March, and the weather was unseasonably cold in the eastern half of the country. So despite continued lofty levels of optimism expressed by homebuilders, we look for at least a temporary pullback in starts from the 20-year high hit in February.
* We look for a 0.6% rise in the March headline CPI and a 0.2% rise in the core. A surge in retail gasoline prices, with seasonally adjusted prices likely to be up about 10%, should be the largest contributor to the sharp rise in the headline CPI. Meanwhile, some flattening out in hotel rates and a further dip in clothing prices should help offset another uptick in airfares. If our +0.2% forecast for the March core CPI is realized, the year/year rate is likely to tick down to +2.3% (and could even hit +2.2%, depending on rounding).
* The index of leading economic indicators likely fell 0.4% in March, matching its largest drop in three and a half years, with the biggest negative contributions from jobless claims, the money supply, and the ISM supplier deliveries gauge. The only positive contribution at this point appears to be a steeper yield curve."
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