U.S. Economic Data and Forex Sample Analysis - for Bacera.com
U.S. Data Summary for Friday, June 1.
The bombardment this week of economic data ended this morning with a slew of U.S. data, signaling a moderately strong to stronger U.S. economy. Leading the way was the Job’s report by the Labor Department, which showed an increase of 157,000 jobs in the month of May versus an forecast of 135,000 by economists. April job growth was also revised down by 8,000 to an increase of 80,000 jobs. Meanwhile, the unemployment rate remained at 4.5%, in line with economists’ forecast. The main piece of data is most likely the average hourly wage, which rose by 6 cents to $17.30, up 3.9% year over year and in line with forecasts. The Federal reserve has expressed concerns that wage inflation may cause inflationary pressures, which may lead the central bank to a tightening bias. While it has been mentioned that Motorola, Dell, and IBM have all recently announced layoffs such that next month’s jobs number might be weaker, we had seen much larger layoffs from the auto and housing sectors at the end of last year but the job market absorbed these layoffs just fine.
Personal income fell by 0.1% while forecasts had expected an increase of 0.3%. However, consumption increased by 0.5% versus forecasts of 0.4%, signaling that U.S. consumers are alive and spending. Furthermore, the report showed that the all important core PCE deflator, the prices paid by consumers for goods excluding food and energy, was 2.0% year over year. The core PCE deflator is believed to be the one of Fed’s premier inflation indicators with the comfort zone being between 1% and 2% year over year. This is the first time this reading has come into this range in the past year.
The ISM index for manufacturing rose slightly to 55 in may versus expectations of 54, showing improvements in the manufacturing sector.
Housing continues to be in a recession as the National Association of Retailers reported the pending home sales index fell by 3.2% instead of a recovery that had been forecasted.
US Data Commentary
The recent strength of the recent strong of U.S. economic data has moved treasury yields near 5%, a level which was seen only briefly last summer after the last rate hike by the Fed. The rise in treasury yields combined with the weaker than expected European consumer data probably caused the recent weakness of the Euro against the Dollar. However, after the Dollar rebounded from its lows in recent months, it has traded in a narrow range. Despite numerous data from Europe and the U.S., data only caused for volatility but limited movement in either direction as the data did not tell traders and investors anything new
. While many traders react to these economic data, we have seen significant revisions to previous month’s data so much so that the reliability and thus significance of the current data is limited to non-existent. We should expect rates and currencies to remain rangebound for the coming months, but the Euro should make gains against the Dollar as globalization continues and weakness in the U.S. housing and auto sectors weigh on the U.S. economy.
On the European front, slight weakness in the consumer is likely to be a nonevent. European multinationals are one of the biggest beneficiaries of globalization. From conglomerates such as Siemens to pharmaceuticals such as Novartis, business from around the world is booming and these corporations are picking up the slack in Europe’s employment rate. It is important to note that while economic growth in Europe may be taking a breather, one of the most important factors driving Europe’s recovery is still the fact that Multinationals have much business outside Europe. Thus, these corporations only minimally affected by conditions within Europe and can still drive Europe’s recovery. European central banks are expected to hike rates on June 6th, and hold steady for a while. Even so, the strength in Europe’s economy and the potential for further growth makes the Euro more attractive than the Dollar going forward.
While recent strength of U.S. economic data has moved treasury yields significantly higher to signal a possible Fed rate hike, I believe the Fed’s only move at the moment is to hold interest rates steady for the remainder of the year. The Fed would only change their position if the current housing recession causes a crisis in the economy, at which point the Fed’s will cut rates maybe by as much as 50 basis points. Whether the housing-led crisis manifests itself through credit problems or weakness in the consumer is yet to be seen. Although the Fed continually cites inflation as their main concern, leaving the door for a rate hike open, inflationary pressures are coming primarily from food, commodities, and energy, all of which the Fed cannot solve with a rate hike as in the past. This time around, it is the BRIC countries (Brazil, Russia, China, India) rather than the U.S. who are driving the demand for commodities, materials, and energy. Food inflation have been caused primarily by the demand for corn due to ethanol, which is a political issue the Fed has no control over. Until housing has a full recovery, a rate hike by the Federal Reserve is impossible as it will take down the consumer and the rest of the U.S. economy.
As with Europe, the recent strength in U.S. economic data can be attributed to globalization and not the U.S. economy itself. Countless corporations cited in their conference calls that profits and growth were accomplished by diversifying away from the U.S. markets. Likewise, corporations showed that their U.S. business were the weakest part of their portfolio of businesses. For instance, the strong ISM manufacturing number was already telecast a month or so earlier by old industrials such as Cummins, who saw strong demand for engines overseas but continued weakness in the U.S. markets. Thus, don’t expect the increase in treasury yields and the strengthening Dollar to be sustainable as the U.S. economy itself remains weak and should continue to be that way for some time.
