New US Data Has Fed’s Hands Tied

Risk currencies have shown surprising resilience following Monday’s sharp selloff, but given mixed US data, the Federal Reserve will likely need more time before tapering asset purchases.

The US dollar (USD) traded slightly higher after this morning's US economic reports, but the data provides the Federal Reserve with little reason to taper asset purchases in the near future.

Inflation remains non-existent 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 US recovery, and given recent disappointments, the Fed needs to be careful about 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.

New York Fed President and Federal Open Market Committee (FOMC) voter William C. Dudley, who spoke this morning, agrees. Dudley said he "favors continuing QE after the March job market slowdown" and cautioned against declaring victory "prematurely."

Chicago Fed President Charles Evans, who is also an FOMC voter, said the US can't be complacent about the economic outlook. He expects the fiscal drag to wipe out between 1% and 1.25% from GDP.

See also: 3 Economic Red Flags…and One False Alarm

More US Data and Policymakers in Focus

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 Governor Elizabeth Duke is scheduled to speak later today as well, and as voting members of the FOMC, it will be important to see if both Duke and Evans share Dudley's concerns.

A Sudden Return to Risk-on

Meanwhile, all major currency pairs were trading higher as risk appetite recovers from yesterday's sharp selling. In particular, the dollar weakened against all counterparts except for the Japanese yen (JPY). On Monday, USDJPY traded as low as 95.81, and it is now hovering near 98.

For the most part, it has been a morning of recovery for risk appetite as traders ignored disappointing Eurozone data, slower UK CPI growth, and the Reserve Bank of Australia (RBA) concerns about Australian dollar (AUD) strength.

Corporate earnings season also continues, so keep an eye on the movements in stocks and comments from other Fed officials. European Central Bank (ECB) President Mario Draghi will be speaking today as well.

By Kathy Lien of BK Asset Management

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