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The dollar rose modestly last week helped by stronger than expected industrial production data as well as firm inflation. The 1.1% February industrial production surge sharply exceeded estimates thanks to big gains in manufacturing and mining. The February headline CPI rose 0.2%, while the core index also rose 0.2% with the growth rate y/y ticking up to 2.2% from 2.1% in January, and the core y/y rate holding steady at 1.8%. Consumer confidence also surprised to the upside showing a preliminary reading of 102.0 in March, up from 99.7 in February and higher than expectations for a reading of 99.3.
Fed Chairman Powell's first FOMC meeting will be the main focus in the coming week with unanimous expectations of a 25bps rate hike, raising the Fed funds band to 1.50-1.75%. In fact regionally SAMA has already raised interest rates by 25bps ahead of the meeting which is being widely seen as pre-emptive move to get ahead of the Fed and help to lessen the impact on the Saibor-Libor spread which turned negative in February.
The most important part of the Fed’s decision will probably be the FOMC's ‘dot plot’ projections along with the forecasts for growth, unemployment, and inflation. Powell and some other Committee members have indicated that they already boosted their own economic outlooks due to the recent fiscal stimulus measures, but these have not been recognized in official forecasts, and it is not clear that it means the median dot will be increased from three to four hikes this year. Data is relatively light this week and most of the crucial reports for the month are out of the way. However, other central banks will also meet in the coming week, notably in the UK and also in Asia. There are also expectations that President Trump could announce more tariffs on imports from China in response to China’s alleged violations over intellectual property.
Source: Emirates NBD Research, Bloomberg
FOMC Forecast revisions, to be released Wednesday alongside the FOMC statement should reveal big boosts in the 2017 GDP estimates, alongside modest upward revisions to the 2018 inflation estimates and small downward revisions to the unemployment estimates across the forecast horizon. GDP growth could be boosted by 0.2%-0.3% through 2019, with a smaller boost in 2020. A 0.1% increase in the Fed's 2018 inflation estimate might also be seen, while the jobless rate estimate could be reduced by 0.1% across the board, given a stronger growth path for payrolls. The dollar’s reaction will likely be to the ‘dot plot’ with an unchanged three hikes this year likely to be met with some disappointment and a softer dollar tone.
Emirates NBD Research