US dollar gains are being capped by disappointing data from all corners of the US economy today, a development that has caused some to wonder if recent dollar optimism was premature or even overblown.
US economic data is taking a turn for the worse, and the disappointments have prevented the US dollar (USD) from extending its gains against the euro (EUR) and Japanese yen (JPY). It is the second day in the row that US data surprised to the downside, and the consistent disappointments over the last 48 hours are now causing investors to wonder if the market's enthusiasm for US dollars were overblown.
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We had economic reports from almost every corner of the US economy, and all of the releases surprised to the downside. Jobless claims jumped from 328k to 360k, the highest level in six weeks. According to the Labor Department, the surge, which was the largest since Hurricane Sandy last year, was not caused by the filings of any specific state. In other words, the increase in job losses was broadly dispersed across the nation, raising some concerns that the increase in filings represents deterioration in the labor market.
Considering that claims have been at extremely low levels over the past few weeks, we feel investors shouldn't read too much into this release until we see a more consistent trend, especially since continuing claims declined.
Ultimately, the surprise was in housing starts, which dropped 16.5% to the lowest level in five months. This steep decline, the largest since February 2011, illustrates how volatile housing market activity can be, as starts rose 5.4% the previous month. However, any concern about the housing sector was alleviated by the 14.3% rise in building permits. Not only was this the largest increase since June 2008, but the rise suggests that the housing market will regain momentum in the coming months.
Meanwhile, the 0.4% decline in consumer prices confirms that inflation is not a problem, and for the Federal Reserve, this offers room to delay changes in monetary policy.
The real concern is manufacturing, as the Philadelphia Fed index turned negative in the month of May, dropping from 1.30 to -5.2. With manufacturing activity contracting in both the Philadelphia and New York regions, it is a possibility that the sector as a whole suffered in March.
Based on the price action of the dollar, which has only given up part of its gains, investors are concerned but not overly distressed about the latest data disappointments. A number of Federal Reserve Presidents are speaking today, but the ones that we really need to pay attention to are Federal Open Market Committee (FOMC) voters Eric Rosengren (Boston) and Sarah Bloom Raskin (Board of Governors).
Rosengren spoke early, and as a well-known dove, he was cautious about the outlook for the US economy. He said that while the labor market has undergone gradual improvement and consumer spending has been relatively robust, the fiscal drag could lead to tepid overall growth. Considering that there is still a "fair amount" of US labor market slack, Rosengren feels that "it still makes sense to have accommodative policy," which suggests he doesn't support tapering asset purchases.
Fed policymaker Raskin speaks around noon ET, and as a moderate dove, she could make similar comments. Non-voting FOMC members including Richard Fisher (Dallas) and Charles Plosser (Philadelphia) were more vocal and made it clear that they support varying the amount of bonds purchased starting as early as June.
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By Kathy Lien of BK Asset Management