This morning’s US economic reports blew the expectation of the most optimistic economist surveyed by Bloomberg. Consumer spending rose 1.6% in the month of March, which was the strongest pace of growth since September 2a017. The consensus forecast was for a 1% rise and the highest prediction called for 1.3% increase. The recent increase in gas prices played a big role but excluding auto and gas purchases, demand was still very strong. Last month’s release was also revised higher as consumers returned after the US government shutdown and their demand was supported by the strong labor market, rise in wages and equity market gains. Consumer spending going forward should remain healthy as jobless claims hit a 50-year low. These numbers suggests that the slowdown at the start of the year is temporary and if this strength continues, a year end rate interest rate hike by the Federal Reserve will be back on the table.
Unfortunately these economic reports were not good enough for USD/JPY. Instead of rallying, USD/JPY sold off after the release. Part of the move could be attributed to the significance of 112 resistance and profit taking ahead of the Easter holidays, but Treasury yields also fell today which means that bond traders were not impressed by the retail sales report. This could be because they don’t believe that one month of strength will sway the central bank’s outlook. Most policymakers have recognized the robustness of the labor market and the potential recovery in spending. Their main concerns are growth abroad and trade – 2 issues that pose serious risks to the US and global economy. With US markets closed on Friday and most other markets closed Friday and Monday, we do not expect Friday’s housing market and building permits report to have much impact on the greenback. If USD/JPY can’t break above 112 in a meaningful way on such good data the chance of it doing so on Friday and Monday is very low.
While the dollar slipped versus the Japanese Yen, it traded higher against all other major currencies. Considering that US stocks were mixed with the Dow moving upwards and the S&P 500 slipping, these moves cannot be attributed to risk aversion. The euro is lower because the PMIs were softer. According to our colleague Boris Schlossberg, the EZ flash PMI readings – the absolute latest measure of conditions on the ground – came in at 47.8 versus 48.1 dropping further into contractionary territory. According to Markit, “Backlogs of work dropped for the fourth time in the past five months and have not shown any growth since last November. The reduction in backlogs was only fractionally smaller than in March, which had seen the steepest decline since December 2014. The only saving grace from the report was rebound in German services PMI which helped offset some of the weakness in manufacturing. It’s difficult to imagine that Europe will see any rebound in manufacturing any time soon and the region’s best hope for growth remain in services where the demand appears to be more stable and stronger.”
Elsewhere, Canadian, Australian and UK data beat but none of their currencies attracted much buying. Canada reported the strongest retail sales growth since May 2018, which should have been wildly positive for CAD especially when combined with this week’s inflation and trade reports but the currency barely budged. Having been stuck in a 1.3280 to 1.34 trading range this month, the only potential catalyst for a breakout is next week’s Bank of Canada monetary policy announcement. Part of the reason why CAD failed to respond to these good reports is because investors are worried that they will not be enough to ease the central bank’s concerns.
GBP/USD dropped below 1.30 despite very strong retail sales. Economists were bracing for a contraction in spending but instead, retail sales grew 1.1%. While most of this increase was due to online purchases, Brexit uncertainties had very little impact o consumer demand. Retail sales rose for the third month in a row but outside of the initial pop, sterling traders faded the data. Australian labor market numbers were also strong with the economy adding 25K jobs in March. Job growth in February was revised higher. But like GBP/USD, AUD/USD rejected the 200-day SMA and extended its losses in the NY session