US markets and macro data: a must-watch (part 2)

In the article posted last Monday, we discussed the Non-Farm Payroll Data published by the US. Today we will discuss about another important economic data- Inflation.

Inflation: The principal cause of concern

The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2% (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is consistent over the longer run with the Federal Reserve”s mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public”s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on an average, are falling– a phenomenon associated with very weak economic conditions. Having a nominal rate of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2% over the medium term.

However, strong Dollar Index and massive fall in Oil Prices have kept Inflation rate at much lower level than FED’s target rate of 2%. Now the main concern for the FED is that even after a series of stimulus process and ultra-low interest rates, Inflation rate has not been moving up, rather it has been hovering around 1.7-1.8% y-o-y and such low levels of inflation is the main obstacle for FED that prevents it from raising the interest rates.

Core Inflation Rate in the United States increased 1.70 percent in February of 2015 over the same month in the previous year. It fell short of the FED target of 2% for the 34th straight month. Core Inflation Rate in the United States averaged 3.73% from 1957 to 2015, reaching an all time high of 13.60% in June of 1980 and a record low of 0% in May of 1957. Core Inflation Rate in the United States is reported by the U.S. Bureau of Labor Statistics.

Therefore, the timing of interest rate hike by the FED largely depends on the two macro data discussed – Job data and Inflation data. Although current unemployment rate is now 5.5% but the actual health of employment is far from the desired state. Recent job addition data (NFP) shows poor numbers; the wage increment was almost flat year on year; Inflation rate is still well below the target rate of 2%. All this has raised the disinflationary fear and does not usher well for the overall health of the economy, especially when interest rate has been near zero since the last 7 years and three round of stimulus (QE) has been injected by the FED. Hence, it is extremely difficult for FED to start the rate hike cycle anytime soon.

Housing Starts

After Job and Inflation data, the next major macro data is the number of new residential construction projects that have begun during any particular month. The New Residential Construction Report, commonly referred to as “housing starts,” is considered to be a critical indicator of economic strength.

US privately-owned housing starts fell 17% to a seasonally adjusted annual rate of 897,000 in February. It was the lowest figure since January last year as the cold weather affected groundbreaking mainly in the Northeast and the Midwest.

The January estimate was revised to 1,081,000 from 1,065,000.

In February, housing starts in the Northeast shrank the most by 56.5%, followed by the Midwest (-37%), the West (-18.75) and the South (-2.5%).

Single-family housing starts dropped 14.9% to 593,000 while the February rate for units in buildings with five units or more was 297,000 (-21.6%).

Privately-owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 1,092,000. This is 3% above the revised January rate of 1,060,000. Single-family authorizations in February were at a rate of 620,000; this is 6.2 percent below the revised January figure of 661,000. Authorizations of units in buildings with five units or more were at a rate of 445,000 in February.

This data is released by Census Bureau on a monthly basis tentatively on 16-17th of every month.


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