Declining US consumer confidence data casts even more doubt about whether tapering asset purchases is a prudent move ahead of next week’s FOMC meeting minutes and the Fed’s Jackson Hole summit.
Weaker-than-expected US economic data drove the US dollar (USD) lower against all major currencies early Friday. On Thursday, we said uncertainty about the outlook for the US economy has led to the volatility in the foreign exchange market, and unfortunately, today's economic reports only add to the question of whether the Federal Reserve would be making the right move by tapering asset purchases this year.
Consumer confidence in the US retreated from a six-year high in August with the University of Michigan consumer sentiment index dropping to 80 from 85.1. The details of the report showed less optimism about current conditions and the future outlook for the US economy, and it’s no surprise that sluggish job growth, the threat of a reduction in stimulus, and stocks declining in the month of August have made consumers feel that way.
Non-farm productivity also rose 0.9% in the second quarter after dropping 1.7% in Q1. Originally, productivity in the first quarter was reported to have grown by 0.5%, but we have now learned that it declined, leaving the US economy with a net loss in productivity in the first half of the year.
At the same time, unit labor costs increased in the second quarter, which means workers are becoming less productive, and yet the cost of labor has risen, which is obviously an undesirable development for the corporate sector.
Housing starts and building permits rebounded in the month of July, but the increase in both were less than expected. Starts rose 5.9% compared to a 7.7% forecast, while permits rose 2.7% versus expectations for a 2.9% increase.
More USD/JPY Volume Coming Soon
Meanwhile, the New Zealand dollar (NZD) is lagging behind the Australian dollar (AUD) today after another earthquake temporarily halted trading on the New Zealand exchange last night. While the epicenter was in the small town of Marlborough, tremors were felt in the capital of Wellington. Thankfully, the damage was only minor and similar to the July 21 quake that left the NZD unscathed.
After being off this week for the Obon holiday, Japanese traders will return to the markets on Sunday night/Monday morning. The USDJPY rallied early this week but the move has stalled since. It will now be interesting to see if Japanese investors jump back into the pair with US ten-year Treasury yields at 2.78%.
Fed Policy in Focus Again Next Week
The coming week will also be an important one, with the Federal Open Market Committee (FOMC) meeting minutes scheduled for release on Wednesday and Federal Reserve officials gathering in Jackson Hole for the annual monetary policy symposium on Thursday and Friday.
While any comments made from policymakers at the symposium will be of great interest, Fed Chairman Ben Bernanke won't be attending. Two months ago, Bernanke dismissed the significance of the meeting by saying, "There's a perception that the Jackson Hole conference is a Federal Reserve system-wide conference; it's not." So while we can hope for added clarity about upcoming monetary policy, we don't have our hopes up.
By Kathy Lien of BK Asset Management