Washington letter, week beginning Feb. 29
What happened last week?
- Upward revision in Q4 GDP
According to official figures announced on Friday, the U.S. economy did not slow as much as previously forecasted, and the growth estimate was revised up to 1 percent from 0.7 percent.
The upward revision reflected a smaller decline in business inventories than the government's first estimate. However, some analysts warned that bigger stockpiling of inventories could weigh on the economy in early 2016.
"In short, the details of the upward revision to GDP were negative, with inventories less of a drag than before. That probably means more of a drag going forward at some point," Jim O'Sullivan, chief economist at High Frequency Economics told Anadolu Agency.
- Higher consumer spending, higher inflation
A report by the U.S. Commerce Department showed that consumer spending increased 0.5 percent in January, marking the highest jump since last May.
The Personal Income and Outlays report also indicated PCE price index, an inflation measure preferred by the Fed, rose by 1.3 percent in the 12 months ending in January. This figure was nearly double the 0.7 percent 12-month gain seen in December. In addition, core PCE was up from 1.4 percent to 1.7 percent on a yearly basis which pointed to a convergence toward the Fed's 2 percent inflation target.
The data regarding the U.S. housing sector provided a mixed picture. New home sales declined to 494K in January, 9.2 percent lower than the unrevised December level of 544K and below the 520K consensus. Existing home sales rose 0.4 percent to a 5.47 million unit rate in January while market expectation saw a 2.5 percent decline or 5.32 million unit rates.
- Fed officials' messages
A large number of Fed officials spoke throughout the week. While some stressed the rising risks in the global economy and pointed to a slower rate hike path, the general message was to keep the "wait & see" approach before taking the next step in the tightening process.
Federal Reserve Governor Lael Brainard's statements on interest rates were worth noting. "Over the past year and a half, the United States has experienced a tightening of financial conditions that is the equivalent of an additional increase of over 75 basis points in the federal funds rate," she said on Friday.
"As policy adjusts to the evolution of the data, the combination of heightened spillovers from weaker foreign economies, along with a lower neutral rate, could result in a lower policy path in the United States relative to what many had predicted," she added.
- New week ahead
This week's focus will be the February employment report, which will be announced on Friday. Markets will try to gauge the strength of the labor market in the wake of a mixed January employment report.
Despite the lower-than-expected job gains in January with 151K nonfarm payrolls, the unemployment rate came down to 4.9 percent and average hourly earnings jumped an outsized 0.5 percent.
The market consensus for February nonfarm payrolls is about 190K and the unemployment rate is expected to hold at 4.9 percent. Average hourly earnings are expected to increase by 0.2 percent.
Moreover, the Fed will release its Beige Book on Wednesday. This is produced roughly two weeks before the Federal Open Market Committee (FOMC) meeting and used while determining monetary policy.
Investors watch the Beige Book to make calculated guesses on FOMC decisions and to position their portfolios accordingly.
The other data releases for the rest of the week include the Institute of Supply Management (ISM) manufacturing index, ADP employment report, weekly unemployment claims, and Energy Information Administration (EIA) weekly petroleum inventory.