The US dollar has recovered some of the ground it lost through the course of February, March and April and we now question just how far the USD's advance can extend.
The improving US labour market has been one of the pillars underpinning the recovery in the US economy, but recent payrolls data for April showed an unexpected drop, whilst previous months saw substantial downwards revisions.
Has the change brought into question the sustainability of the economic rebound or is of just an inconsequential one-off?
The question matters for the dollar.
The US dollar continues firming, trading up by about three tenths of a percent during trading on Monday May 9, despite the fact Non-Farm Payrolls data came out well below expectations on Friday.
Analysts had been expecting a 202k result, but in the end the figures showed only a 160k increase. Whilst this was not a catastrophe, it was the lowest result for seven months notes Markit’s Chief Economist, who interprets the figure as a more negative omen than other analysts:
“Non-farm payrolls rose by 160,000 in April, below consensus expectations of a 202,000 increase. The rise was the smallest seen for seven months. Gains for February and March were also revised down.” He writes.
Williamson does not necessarily see the fall in payrolls on its own as a negative, but rather that it may be a harbinger of anaemic Q2 growth, like Q1 was, and therefore Q1 will look much less like an isolated event and more a part of a negative trend.
Many economists had sought to explain away the poor Q1 growth as resulting from the weather, as well as a potential seasonal effect (you have to go back to 2004 to get a Q1 result which beats Q4).
“April’s data are especially important to policymakers, who are eager to see if the slowdown in the economy in the first quarter will be only temporary.
"By adding to indications that economic weakness is lingering into the second quarter, these disappointing numbers greatly reduce the likelihood of the Fed hiking rates this side of the presidential election.”
Writes Williamson,who sees a slowdown in Q2 as more likely; and also resulting in a further delay from the Federal Reserve in raising interest rates.
He remarks in more detail on Markit’s own hiring survey response data:
“Survey participants report that hiring has slowed in response to disappointing order book inflows and heightened uncertainty about the economic and political outlooks. In the manufacturing sector, the strength of the dollar has compounded these worries. With these concerns showing no signs of abating in April, and election uncertainty intensifying, it would be surprising if the hiring trend didn’t slow further in coming months.”
He sees the Poor PMI data in Q1 as countering the argument that it was a seasonal anomaly:
“The PMI surveys had also indicated that the economy slowed sharply in the first quarter, with only a very modest upturn in April, casting doubt on expectations that the first quarter slowdown will prove temporary.”
Markit’s William’s is particularly negative about the inferences that can be drawn from the NFP data, but despite this, the dollar appears to have shrugged off the poor data, which according to several leading economists has little bearing on when the Fed eventually decides to raise interest rates.
Fed New York President William Dudley, for example, views the payroll figures as having little impact on the Fed’s decision, saying:
“It was a touch softer, maybe, than what people were expecting, but I wouldn’t put a lot of weight on it in terms of how it would affect my economic outlook,” adding, that it remained a “reasonable expectation” that the Fed would hike the interest rate twice this year.
UniCredit’s Global Chief Economist, Erik Nielsen, also dismissed the low payroll figure as insignificant.
“The Fed is unlikely to react to one low number, and the average NFP for the last three months remain a healthy 200k.” He commented in his Sunday Wrap.
Nielsen is of the opinion that markets are not pricing in the possibility of a rate increase sufficiently.
“The Fed says that it will likely hike twice this year, but the market is not buying it. I still haven’t met a single trader or portfolio manager who thinks there’ll be any hike until 2017, and only a fraction of one hike is priced in for late this year, making a bet on the Fed actually doing what it says it will an attractive trade with only limited downside.
“And I continue to think the Fed is more right than markets. Friday’s soft NFP does not change my mind – as it didn’t change Bill Dudley’s mind. My personal guess is a hike in June or July, followed by December.”
He also points to how Fed members themselves have said they would not discount a June cut:
“Second, the message from Fed members continues to convey the view that June is in play. This past week several regional Fed presidents, including Bill Dudley, added to the sentiment articulated very clearly by (usually dovish) Boston Fed President Erik Rosengren two weeks ago, namely “I don’t think the financial markets have it right.”
It's not clear how much the Payrolls' undershoot impacted on Fed intentions, but what is difficult to dispute is the data may have a negative impact on Q2 growth, and if Q2 growth is an poor as Q1 was, that will definitely affect the Fed's intentions. But we also still have two more months of payrolls data before Q2 can be viewed in the round, and there is a possibility it could get better.