Durable Goods to Show Changing Inflation Expectations?

US futures are pointing to a marginally higher open as markets continue to consolidate in this data light week.

The volatility associated with policy changes from the European Central Bank and Federal Reserve appears to have tapered off for now. The ECBs purchasing of government bonds has been priced in and is unlikely to increase any time soon. The Fed has removed its forward guidance stressing that any future policy moves is dependent on there being further improvements in the data. In the absence of data we will have to accept that the rumour associated moves are likely to ease off.

Consolidation is not necessarily a bad thing for the markets though, especially after a period of such volatility. In the long term, the recent trends are likely to continue, dollar strength, euro weakness, lower commodity prices, but things don’t generally move in a straight line. We need further evidence that the Fed will hike rates this summer and this is going to come from the data.

Yesterday’s inflation data didn’t do much to change people’s views and therefore it’s over to other indicators such as employment, wage growth and spending. These all feed into inflation expectations which will inevitably encourage or force the Fed to hike rates. The February reading of durable goods orders this afternoon could give some insight into inflation expectations of consumers and businesses, which is enormously important as a change here could lead to longer term deflationary risks.

When you have a situation in which volatile oil and food prices are weighing on inflation, this can be favourable to an economy like the US as it frees up money for consumers to spend elsewhere, similar to the effects of a tax break. The threat at the moment is that, on top of this, there is a growing threat of deflation being imported into the US, which can have an impact on inflation expectations and discourage spending an investment. While we may not be seeing much evidence of this yet, it is something we should look out for. If businesses and households aren’t investing in items that last longer than three years, it could be a sign that they believe they will become cheaper.

This must be one of the worst case scenarios for the Fed given what Japan has been through over the past couple of decades. This would require a big reversal in policy from one geared towards tightening to one of further increasing its balance sheet in an attempt to lower rates and stimulate spending.

The S&P is expected to open unchanged, the Dow unchanged and the Nasdaq 6 points higher.

For a look at all of today’s economic events, check out our economic calendar.

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