NEW$ & VIEW$ (17 MARCH 2016): Inflation; Missing Barrels; Chinese Consumers.

Fed Dials Back Pace of Rate Hikes Federal Reserve officials reduced estimates of how much they expect to raise short-term interest rates in 2016 and beyond, nodding to lingering risks to the economic outlook posed by soft global growth and financial-market volatility.

Policy makers left short-term interest rates steady and said they expect to raise their benchmark rate just twice this year, after an initial increase in December, down from the four they previously predicted. (…)

“Caution is appropriate,” Fed Chairwoman Janet Yellen said at a press conference after the rate decision was announced, summing up her approach in handling a vulnerable economy, weak global growth and a central bank with few tools to respond if new threats derail the expansion.

(…) without committing to a timetable for rate increases, officials said the next move would depend on “realized and expected economic conditions” and reiterated that they plan to move gradually. (…)

She made clear the central bank is juggling mixed economic signals: a strengthening job market but surprisingly weak wage growth, and a resilient U.S. expansion amid global weakness.

Fed officials still expect the economy to grow briskly enough to cause unemployment to fall and inflation to rise toward their 2% target over time, Ms. Yellen said. If things unfold as forecast, they would likely continue raising interest rates gradually, she said. (…)

“Inflation picked up in recent months,” the Fed’s statement said, however Ms. Yellen cautioned that she is wary about the sustainability of the uptick since it was mostly driven by volatile categories. (…)

After the Fed’s Wednesday announcement, futures market participants put a 42% probability on just one quarter-point Fed rate increase this year and a 22% probability on two. (…)

• Global Risks Play Bigger Part in Fed’s Rate-Rise Outlook

• Fed Hits the Right Policy Note The Federal Reserve’s policy pronouncement Wednesday hasn’t eliminated the threat of recession, WSJ chief economics commentator Greg Ip writes, but by showing a willingness to shift plans when that threat arises, the Fed has cut the odds that its own mistakes will be the cause of that recession.

• Dollar at Five-Month Low as Commodities, Emerging Markets Jump

• Indonesia Cuts Benchmark Rate For Third Month to Boost Growth

U.S. Consumer Prices Fell in February U.S. consumer prices fell in February due largely to a slide in gasoline prices, but other evidence pointed to steadily building inflation pressures that could reassure the Fed as it considers raising rates.

The consumer-price index declined 0.2% over the month, the Labor Department said Wednesday. Overall prices haven’t risen since November and are up just 1% over the past year.

Outside of energy and food, so-called core prices rose 0.3% last month, as items like rent, medical care and apparel became more expensive. Over the past year core prices rose 2.3%, the strongest 12-month gain since May 2012. (…)

Shelter costs, reflecting home rent and mortgage payments, increased 0.3% over the month and 3.3% over the year. The cost of medical-care services climbed 0.5% over the month and 3.9% over the year.

Look at this Haver Analytics table: inflation is accelerating: last 3 and 2 months at annual rates:

• Core +3.2%/+3.7%.
• Core Goods: +2.4%/+3.0%
• Core Services: +3.2%/+3.7%

Now that Core Goods prices have joined Core Services on an accelerating trend, the last thing the Fed needs is rising oil prices.

BTW:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.8% annualized rate) in February. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.6% annualized rate) during the month. The CPI less food and energy rose 0.3% (3.4% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 2.4%, the trimmed-mean CPI rose 2.0%, the CPI rose 1.0%, and the CPI less food and energy rose 2.3%.

Speaking crudely, the Fed is not alone in the dark:

Crude Mystery: Where Did 800,000 Barrels of Oil Go? There is mystery at the heart of the oversupplied global oil market: missing barrels of crude. Where these barrels ended up, or if they even existed, is key to an oil market that remains under pressure from the glut in crude.

Last year, there were 800,000 barrels of oil a day unaccounted for by the International Energy Agency, the energy monitor that puts together data on crude supply and demand. Where these barrels ended up, or if they even existed, is key to an oil market that remains under pressure from the glut in crude.

Some analysts say the barrels may be in China. Others believe the barrels were created by flawed accounting and they don’t actually exist. If they don’t exist then the oversupply that has driven crude prices to decade lows could be much smaller than estimated and prices could rebound faster. (…)

Barrels have gone missing before, but last year the tally of unaccounted for oil grew to its highest level in 17 years. At a time when the issue of oversupply dominates the oil industry, this matters. (…)

In the fourth quarter, the number of missing barrels reached as high as 1.1 million barrels a day, or 43% of the estimated oversupply. (…)

Demand data is derived from models rather than from real measured consumption and is often substantially revised, investment bank DNB Markets said in a research note. More than half of global oil demand also now comes from non-OECD nations where statistical gathering isn’t as well developed, the bank said.

“We hence suspect that demand in non-OECD in reality is meaningfully larger than what is reported by the IEA,” they said. (…)

U.S. Housing Starts Rose 5.2% in February

Housing starts rose 5.2% from a month earlier to a seasonally adjusted annual rate of 1.178 million in February, the Commerce Department said Wednesday.

Starts on single-family homes, which account for roughly two-thirds of the market, rose 7.2% in February to 822,000, their highest level since November 2007. Permits for single-family homes rose 0.4% to 731,000, the second-highest level since the end of December 2007. (…)

Multifamily units, which include apartments and condominiums, rose 0.8% to 356,000. (…)

But new applications for building permits fell 3.1% to 1.167 million, from a revised January rate of 1.204 million, driven by a 8.4% fall in multifamily units. Some of that slowdown could be due to rising prices for land; home builders have been reporting shortages of land and labor for months.

Brian Johnston, chief operating officer of Mattamy Homes, which operates in four U.S. states and Canada, said his company has slowed the pace of land purchasing because prices have gotten so high.

”There are more builders out there and everyone is feeling more positive,” Mr. Johnston said. “They see their land supply diminishing, and they’re getting into the market to replace it.” (…)

Home-starts figures are volatile and often revised. Wednesday’s report showed new-home starts revised up to 1.120 million in January, compared with an initial estimate of 1.099 million. (…) (Charts from Haver Analytics)

U.S. Industrial Production Slips in February

Industrial production decreased a seasonally adjusted 0.5% in February from the prior month after surging a revised 0.8% in January, the Federal Reserve said Wednesday. Total production fell 1.0% in February from a year earlier, the fourth consecutive annual decline. (…)

The Fed said overall capacity utilization, a measure of industrial slack, slipped by 0.4 percentage point to 76.7% in February. It averaged 80% from 1972 to 2015. (…)

Last month’s weakness was concentrated in the mining sector and in utilities, where the Fed said in a statement that “unseasonably warm weather curbed the demand for heating.”

Manufacturing production rose by 0.2% in February after climbing 0.5% the prior month. It was up by 1.8% from February 2015, led by a 9.1% year-over-year increase in motor-vehicle production. (Charts from Haver Analytics)

• US industrial sector on course for flat first quarter

(…) When combined with the mere 0.2% rise signalled for recent core retail sales data, the industrial malaise adds to suggestions that the pace of economic growth could disappoint in the first quarter compared to widespread expectations among analysts of 2-2.5% annualised growth.

Markit’s PMI surveys, which provide a reliable advance indication of economic growth, have also indicated a poor start to the year. Growth weakened further in February after having already slowed in January as problems spread from manufacturing to services, raising the possibility of a stalling of the economy.

Markit US PMI surveys v GDP

China’s consumers tighten belts while retailers cut jobs, offer discounts

Retailers in China are shedding staff, slowing expansion plans and seeing stocks pile up in warehouses as shoppers tighten their belts – a major headache for a country that has pinned its hopes on consumers to drive economic growth.

With that growth running at its slowest in a quarter of a century, China’s consumption patterns are changing, with wealthy middle-class households trading down to more affordable brands, and poorer families paring back on basic purchases.

China’s top 50 retailers saw sales fall 6 per cent at the start of the year, and sales of basic goods from noodles to detergent grew just 1.8 per cent at the end of last year, down from more than 9 per cent just three years ago, according to Kantar Worldpanel data. (…)

This is a problem for sectors from retail to luxury and even fast food, where many international names have banked on continued growth.

Procter & Gamble Co., whose China products include Pampers diapers and Tide laundry detergent, said in January its sales were “significantly down” compared with 2014. Infant formula maker Mead Johnson Nutrition Co. said price competition and a shift to smaller shops and online hit sales. (…)

Westpac Bank’s most recent consumer survey showed sentiment at its lowest since October. “The February update points to continued weak conditions and elevated job-loss fears again weighing on the consumer mood,” said senior economist Matthew Hassan, adding that any loss of momentum for consumer demand could raise the risk that growth stays weaker for longer.

Some firms are bucking the downturn.

International brands offering “affordable luxury,” such as coffee chain Starbucks Corp. and high-end sporting goods giants Nike Inc. and Adidas AG have still grown. Adidas says it has not seen an impact on its business and plans to open about 3,000 stores in China by the end of 2020.

But retail executives and consumer goods makers said China’s slow growth is punishing the sector and forcing many to cut back, focus on smaller, faster-growing cities and offer more discounts.

“We are struggling to adapt as sales move online or to small mom-and-pop stores,” said a senior sales executive at a major Western consumer goods firm. “At the moment, it’s carnage.”

He said inventory levels at some clients had jumped to as much as nine months, from a normal average of around two weeks. (…)

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