Prior Week Summary
We learned from the most recent Fed communication that the pace of any further policy tightening would be dependent on the quality of incoming economic data. While any one data point does not make a trend, the most recent data updates have surprised the market on the downside. The Labor Department reported that wholesale prices unexpectedly fell in March, falling 0.1% on a month-over-month basis after a decrease of 0.2% in February. Economists surveyed by Bloomberg prior to the release had forecast for a gain of 0.2% for the March period. The data revealed that the majority of the drop in prices was attributable to a decline in the machinery and equipment subcategory. Even after eliminating the more volatile components of food and energy, prices were lower by 0.1% for the month.
In a separate report, the Labor Department also reported a drop in consumer prices, in a another sign that the Fed may have good cause to maintain their dovish stance. For the month of March, consumer prices rose by 0.1%, less than the 0.2% forecast, bringing the year-over-year change in the core measure to 2.2%.
Similarly, The University of Michigan consumer sentiment index fell to 89.7, registering the fourth consecutive monthly decline in the data series on pessimism related to the outlook for inflation adjusted incomes. In fact, the report detailed that 48% of respondents are expecting a decline in real incomes in addition to reporting the lowest level of forward inflation expectations in over 35 years.
The Look Forward
Another relatively active data calendar scheduled for this week, starting with updated data on the housing market and manufacturing activity. Additionally, the Fed’s Dudley, Kashkari, and Rosengren will be speaking on Monday in separate events on the state of the economy and monetary policy. The government is also expected to price 5-yr TIPS and 2-year notes throughout the week.