Forex Monthly Economic Review: U.S. Dollar

When it comes to discussing U.S. dollar forex action, Fed interest rate hike expectations are right at the top of the list of potential trend drivers. Now FOMC officials have been giving mixed signals about their monetary policy plans lately so let’s just take a look at the recent economic data ourselves to figure out when the Fed might start tightening.

Employment

Remember that dismal beyond dismal March NFP report that led most forex traders to throw their June Fed rate hike forecasts out the window? Well, market watchers had been hopeful that the April jobs report would show a hiring rebound strong enough to put the U.S. economy back on its streak of better-than-expected employment gains.
Did the NFP report show an improvement for April? Yes. Was it enough to coax the Fed hawks and dollar bulls out of hiding? Not really.
While the actual reading came closely in line with expectations with above-average hiring gains of 223K and was enough to bring the jobless rate down from 5.5% to 5.4%, negative revisions to previous data and bleak wage growth figures indicated that the jobs market isn’t completely back on its feet yet. To top it off, leading employment indicators hint of further weakness, as the Challenger job cuts reading surged to a three-year high of 52.8% in April while JOLTS job openings slipped from 5.14M to 4.99M.

Consumer Spending

With this not-so-upbeat jobs picture, it’s no surprise that consumer spending figures have also failed to impress. Come to think of it, if you’re not very confident about your employment prospects or if you’re worried that you could lose your job at some point, you’d be a bit more frugal with your spending habits, right?
For the month of April, headline retail sales stayed flat instead of showing the projected 0.3% increase while core retail sales posted a mere 0.1% uptick versus the estimated 0.4% gain. Components of the report revealed that purchases of motor vehicles, furniture, and electronics slumped during the month, as Americans held back their purchases of big-ticket items then.
On a more upbeat note, the previous month’s report showed significant upgrades. The March headline retail sales figure was revised to show a 1.1% increase from the initially reported 0.9% rise while the core retail sales reading was upgraded from 0.4% to 0.7%. This suggests that the cold weather conditions during that month didn’t freeze spending as much as previously indicated.

Business Conditions

On a larger scale, business activity saw a few green shoots, as the pickup was mostly led by the services sector. According to the ISM survey for April, the non-manufacturing PMI jumped from 56.5 to 57.8, reflecting a strong expansion in the industry. This is a pretty huge deal since the services industry contributes close to 90% of overall economic growth, comprising various sub-sectors such as healthcare, utilities, retailing, construction and agriculture.
Meanwhile, the manufacturing PMI component of the April ISM report was unchanged at 51.5, reflecting a steady pace of expansion in the industry. Underlying data for orders and production showed modest gains, confirming that the manufacturing sector is still struggling to gain traction while facing headwinds from international demand. This is also reflected in the latest trade balance, which indicated a larger-than-expected deficit of 51.4 billion USD due to the 7.7% jump in imports against the bleak 0.9% uptick in exports.

Inflation

Ahh, inflation, the pain in the neck for most economies for the past few months. It appears that the U.S. economy still has a long way to go when it comes to recovering from the commodity price slide and its nasty aftermath on overall price levels, as the latest PPI reports churned out disappointing figures. Headline producer prices dropped by 0.4% in April versus expectations of a 0.1% uptick while the core PPI showed a 0.2% dip, suggesting that consumer prices could still be facing downside pressure.
Among the major economic reports covered in this roundup, this is probably the biggest factor preventing Fed head Yellen and her gang of policymakers from taking a more hawkish stance. Recall that Yellen specified that they would consider tightening monetary policy only if they are reasonably confident that inflation is on track to reaching their 2% target.
The core PCE price index, which is rumored to be the Fed’s preferred inflation measure, churned out a bleak 0.1% uptick for March and currently stands at an annualized 1.79%. Some say that this is already within striking distance of the 2% inflation goal while others think that it could take at least a year to get there, given the slowing momentum in the U.S. economic recovery. Are you counting on the Fed to hike rates in June or is September a more likely bet?