Real Time Economics: Fed’s Powell Boosts Expectations on Rates | Consumer Confidence Soars | $3 Gasoline? – Real Time Economics


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Today in Real Time Economics, the new Fed chairman raises expectations for higher interest rates, U.S. consumers are feeling supremely confident, gasoline prices are climbing as the oil market rebalances, eurozone inflation softens while European consumers are showing signs of caution, and China’s manufacturing activity slows.

FOUR IS THE MAGIC NUMBER

Federal Reserve Chairman Jerome Powell is pretty upbeat about the economy. That was bad news for stocks and bonds.

The yield on the benchmark 10-year U.S. Treasury note rose, and the Dow Jones Industrial Average and the S&P 500 posted their first loss in four trading sessions after Mr. Powell spoke on Capitol Hill Tuesday. On Wednesday, Asian equities took a dive and Europe dropped in early trade.

Here’s a key passage from Mr. Powell’s testimony:

What we’ve seen is incoming data that suggests a strengthening in the economy. We’ve seen continuing strength in the labor market. We’ve seen some data that will, in my case, add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe. And we’ve seen fiscal policy become more stimulative.”

The takeaway: The Fed is now more likely to raise its benchmark interest rate four times this year, rather than the three officials had penciled in in December. “We are naturally more confident in or standing call for four hikes this year and another four next year,” J.P. Morgan Michael Feroli said.

Next up: Mr. Powell heads to the Senate Banking Committee on Thursday. That will follow release of the Fed’s preferred inflation gauge by about an hour and a half, giving lawmakers and the Fed’s new chairman some fresh data to chew on.

Comments or suggestions for Real Time Economics? Write to Jeffrey Sparshott at realtimeeconomics@wsj.com, tweet to @WSJecon and visit wsj.com/economy for the latest.

WHAT TO WATCH TODAY

A revised estimate of fourth-quarter U.S. gross domestic product is out at 8:30 a.m. ET. Economists are forecasting a 2.5% pace of growth, down from the previously reported 2.6%.

The Chicago Purchasing Managers Index for February, at 9:45 a.m. ET, is expected to slip to 64.0 from 65.7.

U.S. pending home sales for January, due out at 10 a.m. ET, are expected to rise 0.5% from the prior month.

Earlier today, Sweden, Denmark and Finland reported solid fourth-quarter GDP, with annualized growth in the 3% to 4% range. “The big picture is that the outlook for each economy is bright,” said analysts at Capital Economics. All three are small economies but very relevant for the global outlook given how sensitive they are to trade, particularly with the rest of Europe.

 

TOP STORIES

I FEEL GOOD, I KNEW THAT I WOULD

U.S. consumer confidence rose to its highest level since 2000 in February.

Americans are upbeat about business and labor market conditions, as well as their financial prospects, according to the Conference Board’s index. Larger paychecks for most workers this month, reflecting changes to the tax code that recently took effect, may have helped, Eric Morath reports. That, in turn, could be good news for consumer spending, a key driver of economic growth.

The University of Michigan’s consumer sentiment gauge hasn’t been nearly as robust. Early signs, though, suggest an improving outlook. The UofM final reading on sentiment for February is out on Friday.

$3 GASOLINE?

One thing that could dent U.S. consumer wallets, if not necessarily confidence: rising gasoline prices.

Oil Price Information Service forecasts this summer’s driving season is likely to be the most expensive since 2014, with drivers expected to pay an average of $2.79 a gallon for gas, Alison Sider reports. That’s nearly 11% higher than the current national average. Prices in some cities are likely to top $3 a gallon.

Still, that’s not bad compared to 2014 when gasoline prices averaged $3.64 a gallon in April.

SUPPLY, MEET DEMAND

Rising oil prices are one reason gasoline is getting more expensive.

Banks raised their forecasts for oil prices for the fifth month in a row in February, Christopher Alessi reports. Brent crude—the global benchmark—is now expected to average $62 a barrel this year, while West Texas Intermediate, the U.S. standard, should average $58 a barrel. Both predictions are up roughly $1 from the January estimate.

Oil prices have been bolstered over the past year as declining global petroleum inventories have helped to rebalance supply and demand in the market. OPEC’s decision to limit crude production has been central to that.

EUROZONE INFLATION STILL IN HIDING

The annual rate of inflation across the eurozone fell for a third straight month in February.

Consumer prices were 1.2% higher than a year earlier, the lowest annual rate of inflation since December 2016 and well below the European Central Bank’s target of just under 2%, Paul Hannon reports.

The decline had been expected by the central bank. Even so, the slowdown underlines an apparent weakening of the relationship between economic growth and prices that has unsettled central bankers over recent years. The eurozone economy grew at its fastest pace in a decade last year, and seems set to maintain that momentum in 2018.

SIGNS OF CAUTION IN EUROPE’S BIG THREE

U.K. consumer sentiment slipped in February, according to market researcher GfK U.K. Ltd. “Despite…the promise of higher wage increases this year, confidence will remain subdued until we feel the positive impact on our purses,” said Joe Staton, head of experience innovation U.K. at GfK.

German consumer sentiment is set to decline in March, possibly hit by protracted government coalition talks, GfK said. “Despite this light decline the outlook for consumption remains favorable this year,” GfK said.

Meanwhile, French consumer spending dropped sharply and for the second month in a row in January as mild weather reduced household demand for energy. Consumer spending in the eurozone’s second-largest economy fell 1.9% on month and on year in January, French statistics agency Insee said.

YEAR OF THE DOG

Is China’s economy losing some momentum?

The nation’s official manufacturing purchasing managers index, a gauge of factory activity, dropped to its lowest level in 19 months in February. That’s partly because plants closed for the Lunar New Year but also because demand for Chinese exports waned, Grace Zhu and Liyan Qi report.

“However you look at it, internally and externally, downward pressure on the Chinese economy now is big,” said Nomura economist Zhao Yang.

TWEET OF THE DAY

WHAT ELSE WE’RE READING

Pregnancies can help predict a recession. “[W]e show that for recent recessions in the United States, the growth rate for conceptions begins to fall several quarters prior to economic decline,” the University of Notre Dame’s Kasey Buckles and Daniel Hungerman, and the University of Kentucky’s Steven Lugauer write. The findings suggest that fertility behavior is a forward-looking indicator, perhaps because it is sensitive to changes in short-run expectations about the economy.

What does 600 years history tell us about bitcoin’s future? “The long-run evidence suggests that the prospects for privately run monetary systems are dubious,” Bogazici University’s K. Kıvanç Karaman, Bogaziçi (Bosphorus) University’s Sevket Pamuk and Altınbaş University’s Seçil Yıldırım-Karaman write. Historically, innovations from private banks, goldsmiths or money changers have been appropriated, monopolized, supported or banned by the state.

 

UP NEXT

U.S. jobless claims are out at 8:30 a.m. ET on Thursday. Economists expect a slight uptick to 225,000 from 222,000.

U.S. personal income and outlays for January are out at 8:30 a.m. ET. Economists expect income to climb 0.3% and spending to rise 0.2% from the prior month. More closely watched, though, will be the personal consumption expenditure price index, the Fed’s preferred inflation measure. Core prices are expected to increase 0.3% from a month earlier.

Fed Chairman Jerome Powell appears before the Senate Banking committee at 10 a.m. ET.

The Institute for Supply Management’s manufacturing index for February, out at 10 a.m. ET, is expected to slow to 58.5 from 59.1 the prior month.

U.S. construction spending for January, out at 10 a.m. ET, is expected to rise 0.5%.

U.S. auto sales for February are expected to hold roughly steady at a 17.1 million annual pace.

 


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Real Time Economics: Fed’s Powell Boosts Expectations on Rates | Consumer Confidence Soars | $3 Gasoline? – Real Time Economics

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