Last week's economic data continued to demonstrate improvement in the economy. February Retail Sales jumped 1.1%, which was far above expectations. Retail Sales are closely watched because they account for roughly 70% of economic activity. There has been concern that higher payroll taxes and rising gas prices will slow consumer spending, but there have been few signs of this so far. February Industrial Production showed stronger than expected gains as well, and Capacity Utilization rose to the highest level since March 2008. Weekly Jobless Claims dropped sharply, and Continued Claims declined to the lowest level since the middle of 2008. This kind of strong economic growth should support continued improvement in the housing market.

The headline monthly inflation reports reflected large increases due to rising gas prices, but core levels remained well within the Fed's comfort zone. The February Consumer Price Index (CPI) rose 0.7% from January. By contrast, Core CPI, which excludes food and energy, increased just 0.2%. Fed officials prefer to look at core readings of inflation, which exclude the most volatile components and present a better indication of long-term trends. According to the Fed statement, core inflation levels below 2.5% do not pressure the Fed to scale back its bond purchase program, which has helped keep mortgage rates low. This month, Core CPI was 2.0% higher than one year ago, while the Core Producer Price Index (PPI) was even lower at 1.7%.

• Retail Sales posted the biggest monthly increase since September 2012
• The Dow stock index continued to climb to record highs
• The dollar rose to the highest value versus the yen since August 2009
• Fitch downgraded the sovereign debt of Italy

This Week

The big story this week will be Wednesday's Fed meeting. Investors will be interested in the Fed's reaction to the recent strong economic data and whether it will affect monetary policy. The most significant economic data will be the housing reports. Housing Starts will be released on Tuesday, and Existing Home Sales will come out on Thursday. Leading Indicators and Philly Fed will also be released on Thursday. Budget talks also may be an influence on mortgage rates next week, as legislation is needed to fund the federal government past March 27.

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