The big question remains will the Fed raise rates in June? Based on the FOMC statement release last week, there is a somewhat dovish sentiment in the market. It out rightly stated that “economic growth slowed during the winter months, in part reflecting transitory factors.” The pessimism in the tone was also evident as the Fed pointed out that the pace of job gains moderated along with underutilization of labor resources. Also, the analysis of inflation was that it is running below target “partly” as a result declines in energy prices and the stronger dollar negatively impacting international trade. These points confirm the fact that the Fed acknowledges a slack in the economic activities.
Even though the Fed committee has not dismissed the possibility of rate hikes in June, I think the recent downgrade of the economy may prompt that the central bank may have to wait until at least the third quarter to begin raising interest rates. They already stated that: "The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,". With both the labor market and inflation showing weakness so far, more time may just be needed before raising rates.
GDP DISAPPOINTS
The slack in the economy was also presented in the disappointing GDP figures. The US economy increased by a mere 0.2% in the last quarter. This fell below forecast of a 1.0% increase and 2.2% growth in GDP in the previous quarter. A host of factors have been said to be responsible, ranging from the harsh winter weather and delays at West Coast ports, to the harm caused by the plunge in fuel prices and also stronger dollar. It still balls down to the fact that the economic growth has slowed. The dollar plunged with the GDP disappointment, losing ground against its counterparts across board. The S&P 500 Index declined 0.4 percent at the close in New York.
UNEMPLOYMENT CLAIMS FALL
Amid the negative data from the US, it was a relief to see that the number of unemployment claims had dropped for the week. It actually recorded the best weekly result seen about six years as only 262k individuals filled for unemployment claims. Further improvement in labor market reports could serve to affirm that the previous weakness experienced last month was as a result of the weather. The NFP report scheduled for release this week will therefore shed more light on the real picture of the employment situation.
THE WEEK AHEAD
As a new month begins, the week is packed with important fundamental releases from around the world. The much anticipated UK elections will finally be held. Yellen speaks and numerous other important news for the week. Here is a list of some to watch out for:
Monday, May 4 - The major release for the day is from Australia. Building approvals m/m is expected to be less negative than last month. The change in number of new building approvals issued last month came at a negative 3.2%. The new release is expected at -1.7%.
Tuesday, May 5 - We have Trade balance, cash rate, and RBA statement. There has been much anticipation of another reduction in cash rate. It was initially reduced in December to 2.25% and economists have forecast that it will be cut further to 2.00%. Other news for the day include Spanish unemployment change from the Eurozone, Trade balance from the US and Canada. Also, quarterly employment change and unemployment rate from New Zealand.
Wednesday, May 6 - It is another day for Yellen. We expect further insights into the mindset of the Feds and most importantly, clues on the likely time for rate hikes to commence. We also have the ADP non-farm employment change to be released.
Thursday, May 7 - The day the UK and the world has been waiting for. After 5 years, the incumbent PM David Cameron boasts of a recovering economy while Labor leader Ed Miliband points to falling standards of living. Polls show a tight race between both parties and markets patiently awaits the end result.
US unemployment claims will also be released as we wait to see if the impressive results from last week will be carried over into the new week.
Friday, May 8 - We start out the day with the RBA monetary statement. The highlight for the day will no doubt be the Non-farm Payrolls. After the disappointing release last month was largely attributed to bad weather, the new results will be closely watched. It will be a big factor in determining when rates will be hiked. The US unemployment is forecast to fall even further to 5.4% from 5.5%. At the same time, Canada’s employment change and unemployment rate is also due for release.