USDJPY closed around 111.11 in the US session Friday, slumped almost -0.37% despite blockbuster US NFP headline as Goldilocks wage growth, not strong enough to boost the prospect for higher consumer inflation and further Fed rate hikes. But Dow jumped on mixed US NFP job report as it is not too cold, but perfect for the Goldilocks nature of the US economy and consumer spending, yet not too hot for any Fed rate hike action in the coming months. The USD was also dragged by dovish Fed talks on Friday, while Dow got some boost.
The US dollar was also undercut by other mixed economic data on Friday. The ISM non-manufacturing PMI slumped to 55.5 in April from prior 56.1, lower than the expectations of 57.2 The US Service PMI for April edged up to 53.0 from prior 52.9, better than the expectations of 52.9. The Markit composite PMI slumped to 53.0 in April from prior 54.6, higher than the expectations of 52.8.
The US goods trade deficit for March dropped to -$71.45B from prior -80.38B (revised higher than -79.49B), lower than the expectations of -73.00B. Total exports of goods from the US surged by 1% to around $140.30B, while imports also increased by +0.9% to $211.75B. The US has a monthly surplus in services and thus the overall (goods & services) March trade deficit could come below February figure of $49.4B, positive for Q1 revision of GDP.
The US wholesale inventories for March dropped to 0.0% from prior growth of +0.2%, lower than the expectations of no change at +0.2%, may be negative for Q1 GDP revisions.
After a deluge of mixed U.S. economic data, the Atlanta Fed boosted its Q2 GDP forecast to +1.7% from prior +1.2%. The Atlanta Fed said: "After this morning's Advance Economic Indicators release from the U.S. Census Bureau, and this morning's employment report from the U.S. Bureau of Labor Statistics, the nowcast of the contribution of inventory investment to second-quarter real GDP growth increased from -1.52 percentage points to -1.02 percentage points”.
The NY Fed also revised its Q2 GDP forecast to +2.15% from +2.08%. The NY Fed said: "Negative surprises from the ISM manufacturing survey were largely offset by positive surprises from personal consumption and employment data”.
On Friday, after the blockbuster NFP headline with Goldilocks wage growth, the White House CEA/NIC Kudlow said he thinks the Fed is looking at rate cuts because the Fed Fund Future rate indicating the same.
Kudlow said: “With these low inflation numbers, I think the Fed is actually looking at rate cuts, I mean some of which were priced into the market may be up until a few days ago. The White Houses’ views intellectually are not really far apart from the Federal Reserve right now. The Fed is independent and I’m not going to outguess their timing. They are going to do what they want to do on their own time”.
Kudlow argued that despite blockbuster U.S. GDP and unemployment rate, the Fed is going to cut for lower inflation: “What I’ll say is, again, using the analysis, what we found is that all these incentives in the economy, creating strong growth in jobs, with no inflation, and the Fed is looking at the inflation numbers and I don’t think they are inclined to fine-tune real GDP. I think they are inclined to think, low inflation might suggest the need for lower interest rates. There is a good chance the U.S. economy could get 4% growth and below 3.6% unemployment at some point this year”.
Later in a “promotional” video, Kudlow almost “shouted” (boasted) about the U.S. economy: “Wow low unemployment, high jobs, high wages, big consumer confidence, major productivity, and NO inflation. It’s totally awesome; we’re killing it on the economy”.
Kudlow also tried to counter Democrat 2020 front runner and a former U.S. VP Biden on the success of the Trump tax cuts and jobs act. This came after Biden argued that Trump’s tax cuts only benefit the rich, and do little to boost middle-class Americans.
Kudlow said the former VP needed to get his facts straight and urged him to re-examine how successful the president’s policies have been on the economy. Kudlow said many Americans feel much more confident in their personal finances due to the robust job market. Kudlow also pointed out that the majority of job and wage growth highlighted in April’s jobs report came from the blue-collar sector.
On the growing debate about funding for the proposed bipartisan infra stimulus (package) of $2T (over 25 years) and Trump’s unwillingness to fund it through additional tax on gasoline, Kudlow said “I do not favor a higher Federal tax on gasoline to fund an infra initiative, but if states wanted to raise their own gas taxes, that was up to them”.
On Friday, the US VP Pence also echoed Kudlow and argued for Fed rate cuts. Pence said in an interview soon after the blockbuster US NFP headline: “The economy is roaring. This is exactly the time not only to not raise interest rates, but we ought to consider cutting them”.
On Tuesday, Trump also tried his best in an unprecedented way to influence Fed’s decision just ahead of the Wednesday Fed outcome and urged for 1% rate cut with QE-4 like Chinese stimulus. Trump tweeted:
“China is adding great stimulus to its economy while at the same time keeping interested rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go... up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!”
The market is also concerned about Trump’s unprecedented open, consistent attack/public criticism and interfering on the Fed, which was also one of the primary reasons behind December plunge.
On Friday, USD was also affected by dovish talks from a deluge of Fed speakers:
On Friday, Fed’s Bullard, a known dove, sounds moderately dovish and said: “Fed fund rate is a little tight as Inflation is uncomfortably low. The low core PCE inflation is making me a little bit nervous. I would like to take this opportunity to re-center inflation expectations around 2%, which I think would pay dividends. The Dallas Fed trimmed mean is at 2% and we're probably at the point where we want to be assessing the data. Inflation expectations look a little light and I don't think that's a good place to be. I see 2.5% GDP growth this year”.
The St. Louis Fed President Bullard said: “I think we’re a little tight on the fund's rate, not too much but a little bit tight. I think the global safe real rate in the short term is about zero. The single mandate would not change policy much and if the real rate measured against inflation is zero and inflation runs around 2%, then that also should put the Fed’s benchmark at 2%. I would like to take this opportunity to re-center inflation expectations at 2%. I think that would pay handsome dividends for the Fed going forward”.
Bullard argued: "The Fed made a huge move in January by taking future rate cuts off the table. January policy change has helped bring down treasury yields, should boost inflation. A rate cut during boom times would show the Fed is serious on the inflation target. The Fed policy is little tight, it should be careful. We’ve made some big moves in monetary policy over the last three or four months. I think it’s time to wait and see how that’s going to impact the economy going forward. I am open to a rate cut if inflation is still low after summer”.
In a veiled reference to ongoing Fed policy tantrum by Trump & Co, Bullard said: “We get advice from all kinds of people, including you and including other politicians. We get a lot of input from a lot of different angles (but we ultimately do as per incoming/projected economic data for the best interest of America)”.
On Friday, in an academic research report, Fed’s Williams (NYSE:WMB) argued for average inflation targeting; i.e. to keep rates low and let inflation runs higher. Basically, Williams, an influential Fed policymaker and so-called “neutral guru” made the case for changing how the Fed responds to periods of tepid inflation by keeping interest rates “lower for longer”. Overall, Williams sounds more dovish than expected.
The NY Fed President Williams said:
"This paper uses a standard New Keynesian model to analyze the effects and implementation of various monetary policy frameworks in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will be anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy”.
“Two key themes emerge from our analysis. First, the central bank can eliminate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for above-target inflation during periods when the policy is unconstrained. Second, dynamic strategies that raise inflation expectations by keeping interest rates lower for longer after periods of low inflation can both anchor expectations at the target level and further reduce the effects of the lower bound on the economy”.
On Friday, Fed’s VC Clarida, a known policy dove also sounds neutral. In a speech (prepared text), Clarida argued for the Fed’s present patient (neutral) stance with data dependence:
Clarida said: “The Fed can afford to be data dependent as the economy in a very good place. The real wages are rising in line with productivity and the Fed funds rate is now in a range of neutral estimates. Thus the Fed can afford to be data dependent as the inflation pressure is muted and expected inflation is also stable. The economy is at or close to objectives on inflation and unemployment. The U.S. economy is in a very good place. The unemployment rate is at a 50-year low, real wages are rising in line with productivity, inflationary pressures are muted, and expected inflation is stable”.
Clarida argued: “Overall, the US economy is in a good place along with those conditions and the Fed’s benchmark funds rate is around the level that policymakers consider neutral — neither stimulative nor restrictive for growth. So with the economy operating at or very close to the Fed’s dual-mandate objectives and with the policy rate in the range of FOMC participants’ estimates of neutral, we can, I believe, afford to be data dependent ... as we assess what, if any, further adjustments in our policy stance might be required to maintain our dual-mandate objectives of maximum employment and price stability”.
Clarida also pointed out that the U.S. economy was "at or close to" the Fed's objectives on inflation and unemployment and although inflation is "muted" but inflation expectations are "stable”.
Clarida said: "With the economy in a very good place, the Fed can afford to monitor incoming data before making a decision on any further changes to the target interest rate. Financial market information can provide a reality check for officials, but can also be noisy and must be supplemented with information from surveys and good judgment of officials”.
Clarida also does not see evidence of a looming recession at the moment, but the central bank (Fed) needs to be vigilant and alert to risks to the outlook as Fed’s policy needs to be forward-looking, depending on the view of the economic outlook.
Clarida said: “Policy needs to be forward-looking so, decisions that a central bank makes today need to depend upon the view that it has about the evolution of economy”. On a question, whether the US is headed for a recession a year or two down the line, Clarida said: “Fed policymakers are looking at a wide range of indicators (and) we do not see that evidence now”.
On Friday, Fed’s Mester, a known policy hawk sounds neutral/less dovish as she supported the Fed’s patience approach and basically termed lower inflation as transitory.
Mester said: “I do not see inflation pressures are building and I fully support our patient approach as the interest rates are appropriate where they are. We have a strong labor market and stable prices (inflation). The US productivity is positive and moving in the right direction and the productivity growth is positive for the economy. There are some good reasons to think some low inflation is transitory and rates are about at neutral. We have to take seriously our 2% inflation goal as the economy is in a really strong place. I expect a 2- 2 1/2% growth this year as some of the global headwinds have subsided. I would be concerned if inflation expectations fell as the risk is balanced right now”.
The Cleveland Fed President Mester said:
“Our interest rate policy, I think, is exactly appropriate for now and we’ll just see how the economy evolves. I fully support our patient approach to looking at what the data are telling us as it comes in. Our interest rate policy, I think, is exactly appropriate for now and we’ll just see how the economy evolves. The job market is strong and today’s report just reinforces that we have a strong labor market, which is great. We have inflation a little bit below our target, but stable prices. We have productivity growth growing, which is a good positive for the economy”.
“I do think that we have to take seriously our 2% inflation goal and work to try to get inflation back to our goal over time. But I also agree that we need to be patient about it and we need to look at the data and underlying data to understand what’s going on. I would be concerned if inflation expectations were falling if aggregate demand was falling, if the signal of low inflation was that growth was going down, but there’s no evidence of that”.
Mester also added: “The IOER tweak was a technical adjustment, not a policy signal and I do not have the impression that bank reserves are getting scarce and the Fed is always striving to not surprise financial markets”.
Fed’s Kaplan, largely a policy owl (neutral), sounds optimistic as he said the US economy is growing at a solid rate.
Kaplan said: “The economy is running out of capacity in employment and the US economy to grow around 2.5%. The Fed is in the neighborhood of neutral rates and the (Dallas) Trimmed mean inflation is around 2%. The inflation should remain muted because of technology and the global economy; the businesses have less pricing power today. But the US is not immune to weaker growth abroad and I worry that weak growth outside the US could have some muting effect on GDP growth. The skills of the workforce are lagging as the corporate debt is at record levels, in a downturn it could be an amplifier in a downturn. I am glad we have a dual mandate”.
The Dallas Fed President Kaplan basically argued for structural factors behind muted U.S. inflation and said: “It’s not that we don’t have any inflation...Inflation forces I think are going to be muted including technology. Technology enables disruption and to some extent globalization. Businesses have less pricing power today and this comes through in corporate earnings report and it comes through in all my conversations”.
After the blockbuster U.S. NFP headline, Kaplan said the US job market is tight and the US economy is running out of workers.
Kaplan said: “I think it’s still my view that we are running out of the capacity in the workforce. We are bringing people in off the sidelines. But we are starting to approach prime rates of participation pre-crisis and we are reaching pre-recession lows on discouraged workers in a good way. I would expect it’s going to slow down but I don’t think it’s going to be a bad sign”.
On early Monday (Asian session), USDJPY plunged almost -0.75% to a session low of 110.29 on risk-aversion as Trump escalates his China trade war rhetoric quite unexpectedly and threatened China with 25% tariffs despite earlier claiming China trade deal is in very advanced stage (imminent). China also reportedly vowed to abandon further trade deal talks and as a result, Dow future tumbled over -500 points amid global sell-off; China plunged almost -6%.
On Sunday, Trump tried to pressurize China ahead of Chinese VP Liu He’s visit later this week and tweeted that the trade deal with China is too slow, as China attempts to renegotiate.
In a bizarre move, Trump tweeted, claiming that China is now paying tariffs, which is boosting the US economy, at least partially:
“For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars.... of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!”
But USDJPY also recovered to some extent and is currently trading around 110.75, slumped by -0.30% as another report suggested that Chinese Vice-Premier Liu He Likely to delay U.S. trip by three days (rather than complete abandon) and Chinese negotiators preparing to travel to the U.S. for trade talks despite Trump’s threat. But China doesn’t directly answer the question of whether vice premier and top Chinese negotiator Liu He is a part of the Chinese delegation preparing to go to the US. And there is also another report that China may consider skipping trade talks this week, although overall China reaction is quite calm and composed (as usual), rather than fire & fury.
Technically, whatever may be the narrative, USDJPY now has to sustain over 111.00 for a further rally to 111.75/111.95-112.15*/112.50 and 112.95/113.50-114.00/114.55* in the near term (under bullish case scenario).
On the flip side, sustaining below 110.80-110.60*, USDJPY may further fall to 110.00/109.70*-109.00/108.50* and 108.00/107.70*-107.00/106.40 in the near term (under bear case scenario).