Key US Data Releases and Events

Has the recent bond bubble—ignited last year by US growth concerns, the Eurozone debt crisis, and prospects for another round of quantitative easing—come to an end? Longer-term US Treasury notes have traded lower over the past two weeks, pushing up the 10-year yield from 1.92% on February 27 to 2.33% on March 16. There are a number of factors behind this 41-basis-point move. On the one hand, another round of quantitative easing, which has been baked into bond prices, looks less likely now than it did at the start of the year. On the other, the ECB’s Long-Term Refinancing Operation and Greece’s “voluntary” debt swap eased concerns that the Eurozone is on the verge of a sovereign debt and banking crisis, partly unwinding the US Treasury safe-haven bid. Additionally, US economic data have improved recently, raising investor risk appetites for equities to the detriment of bonds. But it is probably too early to declare the bond market bubble over. Interest rates are expected to stay below 3% this year, and could turn lower if US growth slows more than expected or if Eurozone debt troubles flare up again. This was the case in 2011 when 10-year interest rates fell from above 3.5% to under 2% by the end of the year. Another question is what this means for monetary policy this year. The Federal Reserve’s goal has been to support the economic recovery by keeping long-term interest rates low. But if this is a “virtuous” increase in interest rates—one driven by higher optimism in the economy—the Fed may be hesitant to act. Ultimately, the pace of the recovery and evolution of inflation will determine how the Fed responds, not the path of long-term interest rates alone.

Data this past week (March 12–16) were generally indicative of ongoing economic expansion. February retail sales growth bested expectations, thanks to broad-based gains outside of gasoline stations. PPI and CPI inflation for February showed the impact of the energy-price spike, but with little pass-through to core rates of inflation so far. Industrial production was boosted by manufacturing in February, but held back by flat utility output and a decline in mining activity. The one stain on the data record this week was a small decline in March consumer sentiment, as higher gasoline prices overwhelmed improved employment prospects. Also troubling was an increase in long-term consumer inflation expectations to 3.0%, from 2.7% in January. Meanwhile, the Federal Open Market Committee held its second meeting of 2012. The Fed’s outlook on both the economy and the labor market improved, while worries that higher energy prices will spark persistently higher inflation were minimal. The committee decided to hold steady on policy, neither easing further nor withdrawing previous stimulus.

The data this week (March 19–23) focus almost exclusively on the housing market, and the news is expected to be mildly optimistic. New and existing home sales results for February should show modest gains. Housing starts, which have been elevated due to warmer winter weather in December and January, should be close to last month’s level. But housing permits are expected to grow, signaling advances in new construction down the road.

Tuesday, March 20– Housing Starts (Feb.)

Housing Starts

• IHS Global Insight: 0.695 Million
• Consensus: 0.700 Million
• Last Actual: 0.699 Million (Jan.)

Building Permits

• IHS Global Insight: 0.697 Million
• Consensus: 0.685 Million
• Last Actual: 0.682 Million (Jan.)

What to Look For

• Mild winter weather to keep housing starts elevated

Implications

Mild winter weather lifted the housing start numbers in December and January. February’s weather was also mild—so starts are expected to remain a bit elevated at 0.695 million units (annual rate). Housing permits, which are not affected by weather as much as housing starts, should climb by 2.2%, to a 0.697-million-unit annual rate.

Wednesday, March 21 – Existing Home Sales (Feb.)

• IHS Global Insight: 4.60 Million
• Consensus: 4.60 Million
• Last Actual: 4.57 Million (Jan.)

What to Look For

• Small uptick in closings

Implications

Recent increases in pending sales of existing homes point to higher final existing home sales in February. A small increase of 0.03 million units is expected, with stronger single-family sales offsetting a decline in condominium and co-op sales.

Friday, March 23 – New Home Sales (Feb.)

• IHS Global Insight: 0.330 Million
• Consensus: 0.325 Million
• Last Actual: 0.321 Million (Jan.)

What to Look For

• Better sales, but still weak

Implications

The recent increase in the NAHB/Wells Fargo Housing Market Index is a sign that demand for new single-family homes is picking up, albeit slowly. This pickup should show up as a modest 2.8% increase in new home sales during February, to a 0.330-million-unit annual rate.

by Nigel Gault and Paul Edelstein