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Sunday, February 21, 2016
MORE FOCUS ON FED AFTER CPI ROSE ABOVE FED'S 2.0% TARGET
The more you look at the financial market and economy, the more uncertainties might surface. When we were coming into 2016, most people were talking about the possibilities of three to four interest rate hikes but just about 2 months down the road, the tone had changed with market participants changing their view to a possibility of the Fed raising the rate as once, if at all, in light of weak inflation and global volatility.
But just one new data and we've got people getting up on their feet and watch for Federal Reserves for clues about the US central banks next move because apparently, there is a hot reading on inflation on Friday.
Friday's data showed the core consumer price index (CPI), a measure of underlying U.S. inflation, rose in January by the most in nearly 4-1/2 years to a 2.2 percent annualized rate.
It drew particular attention as the number was above the Fed's 2.0 percent target, though it is not the central bank's benchmark inflation measure.
The uptick in price pressures has already shifted the market's expectations on the Fed's next move.
The dollar rose alongside Treasury yields shortly after the data, as markets saw the higher inflation as nudging the Fed towards tightening policy. The euro hit its lowest since Feb. 3.
Equity markets have also closely followed expectations on Fed policy. Lower rates tend to support stocks in general, with high-paying dividend names like utilities gaining investors' favor. In an environment of rising rates, banks tend to take the lead.
The expectation of higher interest rates has been cited as one of the reasons for stocks having fallen as much as 11 percent this year.
The S&P 500 .SPX is down 6 percent so far in 2016, and on track for its third positive week of the year.
The inflation numbers add to recent economic data, including a stronger job market and consumer spending, that will force the Fed to seriously reconsider more rate hikes, said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.
"UNWISE" TO RAISE RATES?
Personal consumption expenditures, the Fed's favorite measure of price inflation, is out next Friday and could confirm or outweigh the trend in the CPI reading. Among other market-moving numbers next week are purchasing managers indexes (PMIs) for the manufacturing and services sectors and two gauges of consumer confidence.
Investors and the Fed could address a decline in earnings, now seen as down 3.7 percent for the S&P 500 in the fourth quarter of last year, and lower outlooks for 2016 as other reasons to keep rates lower for longer.
The incoming data gives more weight to next week's scheduled speeches from many Fed officials, including Vice Chair Stanley Fischer on Tuesday and Atlanta Fed President Dennis Lockhart on Thursday as markets look for a change in tone. Two Fed surveys of business conditions, Richmond and Kansas City, are also out next week.
In a U-turn late on Wednesday, Fed voting member and hawkish St. Louis Fed President James Bullard said it would be "unwise" to raise rates further given U.S. inflation data and global volatility. He speaks Wednesday in New York, followed by questions from the media.
The Fed's policy-setting committee next meets March 15 and 16 in Washington, with a statement followed by a news conference with Chair Janet Yellen.