USD: Uneven US Data will keep Fed Cautious

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

To the Federal Reserve’s relief, the latest round of economic reports confirm that the U.S. economy is gradually improving. Jobless claims dropped to 335K last week to its lowest level in 5 years. While the labor department said the data could be distorted by the difficulty of adjusting for seasonal changes around the holidays, the sharp improvement in claims is unambiguously positive for the U.S. economy and the U.S. dollar.

Even if jobless claims rise back above 350k, on average claims are still in very good shape and consistent with a continued recovery in the U.S. labor market. Continuing claims dropped to 3.214 million from 3.127 million and the less volatile 4 week moving average also fell to 359k from 366k. But the good news didn’t just end there – housing starts jumped 12.1% to a four year high of 954k. Permits rose by only 0.3% but the disappointment was offset by the rise in starts.

Unfortunately one area of the U.S. economy is deteriorating and its the manufacturing sector. Earlier this week we learned that manufacturing conditions in the NY region contracted at a faster pace in the month of January and today the Philadelphia Fed manufacturing index dropped to -5.8 from 4.6. The surprise contraction indicates that the manufacturing sector is losing momentum, a condition that also reported in the Beige Book.

The question now is whether these improvements are enough to convince more FOMC voters that it is time to start considering phasing out asset purchases this year and the answer is no. While the drop in jobless claims will make the Fed less worried about rising unemployment, the unevenness of the U.S. recovery will keep the central bankers cautious about removing stimulus prematurely. For the currency market, the weaker Philly Fed index stripped away some of the gains that the dollar achieved after the jobless claims report.

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