Markets Cautious With Fed on Deck

US stocks are trading close to unchanged while Treasuries are selling off marginally as investors remain cautious ahead of the outcome of the March FOMC meeting.  Policymakers are widely expected to keep monetary policy unchanged, but the market will have plenty to digest from the accompanying statement, Summary of Economic Projections, and Fed Chair Yellen’s press conference.  The forward guidance is likely to indicate a “gradual pace” of tightening for the rest of the year, with the Fed’s dot plot expected to show 3 increases rather than the 4 indicated in December.  Even so, the median FOMC projection is likely to imply a more aggressive upward rate path than the trajectory currently being implied by the markets.  The Fed meeting will be the third major central bank policy event within the last week, following the ECB’s expansion of QE on Thursday and BoJ’s inaction yesterday.

Aside from Fed speculation, markets were dealing with a heavy US data calendar, headlined by the latest look at inflation and housing.  The data generally surprised to the upside.  Core consumer prices, which excludes the volatile food and energy components, rose 0.3% last month after a similar gain in January.  The increase boosted the YoY core CPI to 2.3%, the largest increase since May 2012.  Separate data showed housing starts increased 5.2% to the highest level in five months, while underlying data in the industrial production report showed manufacturing output may be stabilizing.  The combination of rising inflation, a healthy housing market, and tightening labor market conditions should support the Fed’s expected moves to tighten later this year.
 
All three major US stock indexes are trading on either side of unchanged, WTI crude is up 4%, and Treasury yields and swap rates 2-4 bps higher across most maturities.