Regardless of whether you believe that the Federal Reserve is tapering prematurely, today's jobless claims report confirms that their process of unwinding Quantitative Easing is not hurting the economy. Exiting from a long period of ultra easy monetary policy is always tricky and if done carelessly could put the entire recovery at risk. This explains why the Federal Reserve has been so adamant about stressing that policy will remain extremely accommodative and reluctant to put timing on tightening. They want to make sure that rates stay low, providing continued support to the economy.
Muted Reaction
Unfortunately investors have not been impressed by the recent improvements in the labor market and part of the reason is because forward guidance is working too well. The Fed has done a fantastic job of convincing the market that rates will remain low for a very long period. At the same time, the economy is not improving as quickly as economists and investors would like -- there are still pockets of weakness in the manufacturing and housing markets. It is also important to remember that this month's jobless claims reports are distorted by Passover and Easter holidays.
The number of Americans filing for unemployment benefits rose to 304k in the week ending on April 12th from 302k. These are the lowest levels that we have seen jobless claims at since the global financial crisis and the less volatile 4-week moving average also fell to its lowest level since October 2007. Fewer layoffs are starting to translate into more hiring but the pace of improvement has been slow and until wage growth picks up, policymakers will be reluctant to tighten. Earlier this week we learned that manufacturing conditions in the NY region grew at a significantly slower pace but manufacturing activity in the Philadelphia surged this month with the Philly Fed index rising to its strongest level since September 2013. More specifically the Philly Fed index jumped from 9 to 16.60 in April.
With U.S. markets closed tomorrow for Good Friday and no additional economic reports scheduled for release we do not expect much momentum in the dollar, which will most likely end the week slightly stronger against the euro and Japanese Yen.
Kathy Lien, Managing Director of FX Strategy for BK Asset Management.