When I last checked in with my ongoing reports on where the bets on options for federal funds futures are being placed, the probability of continued rate hikes through June was making a run for the money on the strength of positively-received economic data. Oh, but that was before Chairman Bernanke's comments before the Joint Economic Committee on Thursday, which were generally interpreted as suggesting "it's our party and we'll pause if we want to." A day does make a difference:
This week starts, of course, with yet more evidence that the economy was cruising along in the first quarter...
...the Commerce Department reported personal spending rose 0.6 percent in March, helped by a 0.8 percent gain in income, which was the biggest increase since September. Construction spending rose 0.9 percent in March, the Commerce Department said today.
... and apparently continued to do so as the second quarter began:
Manufacturing growth in the U.S. accelerated last month as companies stepped up production to meet demand, a private survey found.
Factories are picking up production and investing in new equipment to meet demand as U.S. consumers keep spending, while growth quickens in Europe and Japan. Economists expect business investment this year to help the economy weather a slowdown in the housing market that may dampen consumer spending.
"Factory activity remains very solid,'' Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ in New York, said before the report. "We could definitely sustain these levels for the first half of the year because we have continued to see such strong demand.''
As positive as those reports, which came from Bloomberg, were, the price data for the first part of the year gave plenty of excuses for furrowed brows, as we already suspected. From Reuters:
The Commerce Department said the price index for consumer spending shot up 0.4 percent, while the core price index closely watched by policy-makers at the Federal Reserve rose 0.3 percent. The rise in the core inflation measure was a touch ahead of Wall Street forecasts and the largest one-month rise since October...
... the rise in the core index, which strips out volatile food and energy prices, moved up to 2 percent -- the upper edge of the Fed's perceived inflationary comfort zone.
The Dallas Fed reports my own favorite PCE-based core inflation measure, based on the trimmed-mean, and the March reading on that statistic was as horrid as the other numbers:
The trimmed-mean PCE inflation rate for March was an annualized 3.7 percent.
According to the BEA, the overall PCE inflation rate for March was 4.4 percent, annualized, while the inflation rate for PCE excluding food and energy was 3.9 percent.
Both the annualized 6-month and the 12-month rates of inflation on the Dallas core measure remained in the neighborhood of where they have been over the past half year, at 2.4 percent (annualized) and 2.3 percent respectively a tad north of Reuter's suggested comfort zone.
All that said, the markets were not necessarily impressed. From yet another Reuters article:
Futures fully price a 25-basis-point rate increase at the Federal Reserve's May meeting <FFK6>, but chances that the central bank will hike rates again in June <FFN6> held at 30 percent, similar to its level shortly before the report.
Tomorrow is, of course, another day.
Here is the data in the picture above...
Download implied_pdf_june_042806.xls
... and multiple variations of the Carlson-Craig-Melick estimates for both May and June (through Friday):