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Key U.S. Data Releases and Events14 Mar 08Indicators on February industrial production and housing starts/permits next week are expected to further solidify the case that the U.S. economy slipped into recession several months ago. Global Insight is projecting that the FOMC will vote to reduce the federal funds rate by 75 basis points on March 18, and there is an outside chance that the Fed will cut rates by an even deeper 100 basis points. Pressures in the economy and financial markets continued to intensify last week, with further signals of a U.S. recession emanating from weak retail sales reports. Mounting concerns about the state of the economy were compounded by severe pressures in the financial sector—despite the Federal Reserve's massive ramping up of liquidity and other market support operations since March 7. These issues came to a head on Friday with the stunning Fed-orchestrated bailout of Bear Stearns. While the bailout defused immediate concerns about the short-term viability of Bear Stearns, it raised other concerns about the ultimate solution to the severe funding problems afflicting several major financial intermediaries, the persistence of the flight to quality, and further prospective write-offs of mortgage-backed securities. In light of these developments on the economy and in the financial markets, we are projecting that the FOMC will vote to reduce the federal funds rate by 75 basis points on March 18. There is an outside chance of a deeper 100-basis-point cut, given turbulent conditions in financial markets. Indicators on February industrial production and housing starts/permits next week are expected to further solidify the case that the U.S. economy slipped into recession several months ago. Core producer prices, however, are expected to increase by a relatively tame 0.2%. KEY U.S. DATA RELEASES AND EVENTS THIS WEEK Monday, March 17 – Industrial Production (Feb.) Global Insight: -0.4% What to Look For
Implications Industrial production is expected to have faded 0.4% in February, with few positive signs apparent. Light-vehicle unit production dropped about 4% last month, while manufacturing hours worked fell 0.5%.The aerospace and high-tech industries probably did fine, but are not poised to grow strongly enough to offset weakness elsewhere. Weather should not be an important factor for utility production, having been tolerably close to normal in both January and February. Tuesday, March 18 – Housing Starts and Building Permits (Feb.) Starts Permits What to Look For
Implications Housing starts got a boost in January from favorable weather in the Northeast and Midwest. We expect starts to have declined in February, partly because of more normal weather patterns, but mostly because builders are still backing off from starting new homes. Monthly housing permits have dropped about 4% on average over the past six months. We expect a 4.3% drop in February, to 1.015 million units. Residential construction should exert a severe drag on the economy during the first half of 2008. Tuesday, March 18 – Producer Price Index (Feb.) Total Core What to Look For
Implications We expect producer prices rose 0.6% in February on higher food and energy prices. Although gasoline prices will be down slightly from January, higher natural gas and heating oil prices should send the energy index upward. With grain futures pushing ever higher, we look for an even stronger contribution from food prices. Excluding food and energy, we expect that "core" producer prices decelerated in February and rose 0.2%, following the 0.4% jump in January. Tuesday, March 18 – FOMC Rate Decision Global Insight: 2.25% What to Look For
Implications The Federal Open Market Committee is expected to vote to reduce the federal funds rate by 75 basis points, to a level of 2.25%, on March 18. Recent indicators on consumer spending, construction activity, and manufacturing output suggest that the economy is already in recession, which at this point should be the Fed's primary concern. Added to these worries, stresses in financial markets have increased, notwithstanding the Fed's surgical strikes to provide liquidity and accept a broad range of term lending collateral, with spreads on term borrowing instruments rising in a continued flight to quality. In addition, severe funding pressure has emerged, threatening the viability of two major financial intermediaries—Bear Stearns and Carlyle Capital. There is an outside chance of a deeper 100-basis-point rate cut, given turbulent conditions in financial markets and a very favorable February report on core consumer prices. by Brian Bethune and Nigel Gault
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