The U.S. dollar traded slightly higher after this morning’s U.S. economic reports but the data provides the Federal Reserve with little reason to taper asset purchases in the near future. Inflation remains nonexistent while housing market indicators were mixed. Consumer prices dropped 0.2% in the month of March, which was the fourth time in five months that CPI either stagnated or declined. Core price growth also slowed to 0.1% from 0.2%. We are beginning to see unevenness in the U.S. recovery and given recent disappointments, the Fed needs to be careful with reducing stimulus prematurely. One month worth of weaker data doesn’t make a trend but if these signs of slower growth persist the central bank won’t be able to make any changes in monetary policy until the fourth quarter. FOMC voter Dudley who spoke this morning agrees – he said he “favors continuing QE after the March job market slowdown” and cautioned against declaring victory “prematurely.” Evans who is also a FOMC voter said the U.S. can’t be complacent about the economic outlook – he expects the fiscal drag to wipe out 1-1.25% from GDP.
Aside from consumer prices, housing starts and building permits were also released this morning. Starts were strong – rising 7% in the month of March after a significant upward revision the previous month. February starts were revised from 0.8% to 7.3%. Unfortunately building permits dropped 3.9% that same month with the past month’s report revised down to 3.9% from 4.6%. While the large increase in starts in February and March overshadow the drop in permits, it won’t be enough to ease the Fed’s concerns about the pace of the recovery. Industrial production increased 0.4% last month but manufacturing production dropped 0.1%. Fed President Duke is scheduled to speak later today – both are voting members of the FOMC so it will be important to see if they share Dudley’s concerns.
Meanwhile all of the major currency pairs are trading higher this morning as risk appetite recovers from yesterday’s sharp selling. The dollar in particular weakened against everything except for the Japanese Yen. On Monday, USD/JPY traded as low as 95.81 and is now hovering near 98. For the most part, it has been a morning of a recovery in risk appetite as traders ignored disappointing Eurozone data, slower U.K. CPI growth and the RBA’s concerns about AUD strength. Earnings season continues so keep an eye on the movements in stocks and comments from other Fed officials.