By Theresa Sheehan

PRINCETON (SMRA) – With the data for employment and retail sales
out of the way, markets will next focus on that for inflation. The week
ahead includes back-to-back-to-back releases of three inflation
indicators on Tuesday through Thursday. These will capture the first
wave of increases in gasoline prices in February.

The data will also include a number of reports related to the
factory sector, and markets will be watching to see if the recent pickup
in orders and employment continued into March.

The FOMC meeting on Tuesday will probably serve as a placeholder
until the April 26-27 meeting. Signs of a more sustainable recovery and
stable inflation expectations will need another month or two of data
before the Fed is likely to start any shifts in policy. The FOMC will
not have the February CPI data when they meet on Tuesday, and the PCE
deflator for February is not released until Monday, March 28.

The Economic Data

The three-in-a-row release of February data for import prices,
producer prices, and consumer prices will probably confirm Fed Chairman
Bernanke’s expectations for only modest pass-through of higher input
costs — at least so far — and gains at the core should be consistent
with inflation moving slowly towards the Fed’s target of 1.7%-2.0%.

Data on import prices for February at 8:30 ET on Tuesday should
once more pivot on the petroleum component. The largest gains in prices
came towards the end of the month, and overall should produce only
moderate gains for the month.

March could prove to be a different story. In any case, prices for
non-petroleum imports are probably going to see some impacts from the
declines in the dollar and higher prices for some industrial raw
materials. Export prices should reflect climbing demand for food grains
and soybeans, as well as higher prices of manufactured US goods.

Gains in the February Producer Price Index at 8:30 ET on Wednesday
will probably be mild. The energy component takes it’s reading in the
second week of the month. The price of oil in the February 14 week was
below that in the corresponding January period. Nonetheless, the Fed’s
Beige Book indicated that some manufacturers were raising prices and
expected the increases to stick. Pressures in the pipeline from crude
materials and intermediate goods are probably on the rise.

The Consumer Price Index for February at 8:30 ET on Thursday should
report a modest increase in prices, mainly in food and energy. However,
it will be the housing component that will have something to tell about
fundamental upward movement in prices. Rents and Owners’ Equivalent Rent
(OER) have begun to register incremental advances after a long period of
stagnation. In turn, this should help start the process of returning
inflation to more normal levels and further reduce deflation concerns.

The Fed surveys of manufacturing for March from the New York and
Philadelphia District Banks will be released at 8:30 ET on Tuesday and
10:00 ET on Thursday, respectively. While conditions have been strong in
the last few months in both districts, the outlook for six months from
now has been deteriorating somewhat due to concerns about rising input
costs. Nonetheless, readings are still solidly positive, and contribute
to a more optimistic prospect for the factory sector.

The Fed’s report on industrial production and capacity utilization
for February at 9:15 ET on Thursday should show a modest increase for
manufacturing production, while utilities and mining output is likely to
be little changed.

The NAHB/Wells Fargo Housing Market Index for March at 10:00 ET on
Tuesday will probably add one more to the string of index readings of 16
that have persisted for four months. The housing market generally
remains sluggish, particularly for new home construction. This may start
to change when spring arrives, but for the moment, builders have little
reason to alter their currently pessimistic views.

The data on starts of new homes in February is set for release at
10:00 ET on Wednesday. Starts for multi-units have been quite volatile,
but for single-family homes the level has remained range-bound between
410,000-460,000 since May 2010. This has paralleled the readings for the
NAHB index since that time.

Initial jobless claims for the week ended March 12 at 8:30 ET on
Thursday should bring further evidence that the labor market is
improving. New claims appear to have firmly established a trend below
400,000. This will be the survey comparison week for March from
February.

The Conference Board’s Leading Economic Index for February at 10:00
ET on Thursday is expected to bounce back from a slow 0.1% rise in
January. Positive contributions are expected from all components of the
index, the strongest of which should be in interest rates, jobless
claims, and consumer confidence.

The Treasury International Capital System (TICS) data for January
at 9:00 ET on Tuesday will provide a fresh look at foreign purchases of
US debt and equities.

The fourth quarter current account balance at 8:30 ET on Wednesday
will follow the direction of the international trade data. The trade
deficit was narrower in the fourth quarter, in part due to stronger
exports of US goods. The new data will include remittances abroad.

Central Bank Activity

The FOMC meets on Tuesday to discuss monetary policy. No changes
are expected in interest rates. The Large Scale Asset Purchase program
should also remain as previously announced, although there is the
possibility that the Committee will decide to taper off purchases over a
longer time while leaving the $600 billion size of the buys intact.
While we anticipate that the first hints of removal of policy
accommodation will start to emerge in this statement, they will be
tentative. More substantive action will likely wait until the April
26-27 meeting.

In advance of the FOMC meeting, the Board of Governors should meet
on Monday in closed session to discuss the discount rate. At this time
it seems unlikely any change in the current 0.75% rate will be
undertaken. However, at some point the Board is going to want to start
to normalize the spread between the fed funds rate target and the
primary rate. This would be back to 100 basis points between the upper
range on the fed funds rate and the discount rate. It is mainly a matter
of timing as borrowings at the discount window have returned to
pre-crisis levels, and are currently only a few million in any given
week. The Board will want to avoid any action that markets would
interpret as a tightening.

The Bank of Japan Policy Board meets on Monday and Tuesday. No
changes are expected.

There are no more policy announcements scheduled for major central
banks until the first full week in April.

Treasury Auctions

The Treasury will auction new 2-, 5-, and 7-year notes on Tuesday
through Thursday, respectively. All will settle on March 31. A reopening
of the 10-year TIPS notes will be announced on Thursday, to auction on
Thursday, March 24 and settle on March 31.

** Stone & McCarthy Research Associates **

[TOPICS: M$$FI$,M$U$$$,MAUDS$]