- Odds for June FOMC rate hike rise after meeting results
- Initial unemployment claims expected to fall back
- U.S. trade deficit expected to remain wide
- U.S. productivity expected to remain poor
- U.S. factory orders expected to extend winning streak
Odds for June FOMC rate hike rise after meeting results — The FOMC at its Tue/Wed meeting left its funds rate target range unchanged as expected. The post-meeting statement was a bit hawkish because the FOMC indicated that it believes that the economy is stable despite Q1 weakness. The post-meeting statement said that the Committee “views the slowing in growth during the first quarter as likely to be transitory” and that the fundamentals for consumer spending “remained solid.” The FOMC still seems committed to its plan for two more rate hikes in 2017 and a change in its balance sheet policy by year-end. There was no specific mention of balance sheet deliberations.
The market on Wednesday mildly raised the odds for a rate hike at the next FOMC meeting on June 13-14 to about 80%. If the Fed raises the funds rate at its next meeting in June, that would leave plenty of time for the Fed to implement its plan for a third rate hike and a shift in its balance sheet policy later this year.
Initial unemployment claims expected to fall back — The initial claims series has risen by a total of +23,000 in the past two reporting weeks and is currently mildly elevated at +30,000 above the 44-year low of 227,000 posted in February. However, the series is likely just showing distortions from the Easter holiday and today’s report in any case is expected to show a -8,000 decline to 249,000. There is little to suggest at this point that an upswing in layoffs is beginning.
Meanwhile, the continuing claims series remains in very good shape at only +10,000 above the 17-year low of 1.978 million posted in the first week of April. The consensus is for today’s continuing claims report to show a small +2,000 increase to 1.990 million after last week’s -1,000 drop to 1.988 million.
U.S. trade deficit expected to remain wide — The market consensus is for today’s March U.S. trade deficit to widen mildly to -$44.5 billion from -$43.6 billion in February. Today’s expected deficit of -$43.6 billion would be mildly wider than the 12-month trend average of $41.9 billion.
The good news for the U.S. trade deficit is that exports have risen for three straight months by a total of +3.5% and are up sharply by +6.7% y/y. U.S. exports are now only -3.7% below the record high posted in October 2014. U.S. exports are improving due to stronger overseas growth and the mild decline in the dollar from January’s 14-year high. However, imports have also been strong in recent months and have kept the trade deficit from narrowing. Imports are up +4.5% y/y and are only -2.0% below the record high posted in December 2014.
The U.S. trade deficit report has taken on much more political importance since the Trump administration is looking for opportunities to boost exports and cut imports. In February, the U.S. had trade deficits of -$23.0 billion with China, -$4.7 billion with Japan, and -$4.4 billion with Germany. With its NAFTA partners, the U.S. in February had trade deficits of -$5.8 billion with Mexico and -$2.1 billion with Canada.
The wide U.S. trade deficit continues to be a bearish underlying factor for the dollar since about $1.2 billion worth of dollars flow overseas every calendar day. However, those excess dollars are a drop in the bucket for the FX markets, which trade an average of $5 trillion worth of currencies every day with 88% of that trade involving U.S. dollars, according to the BIS.
U.S. productivity expected to remain poor — The consensus is for today’s Q1 non-farm productivity report to be very weak at unchanged, down from Q4’s +1.3%. Q1 productivity is expected to be weak in part because Q1 GDP output growth was so poor at +0.7%. At the same time, staffing levels are high with the U.S. economy near full employment.
U.S. productivity has been very poor in recent years with an 8-quarter average of only +0.7%, far below the post-war average of +2.2%. The low level of U.S. productivity is negative news for corporate profits and real employee wages. Meanwhile, today’s Q1 unit labor costs report is expected to jump to +2.7% (q/q annualized) from Q4’s +1.7%, providing another indication of the upward pressure on wages.
U.S. factory orders expected to extend winning streak — The market consensus is for today’s March factory orders report to show a +0.4% gain, adding to Feb’s gain of +1.0%. Factory orders excluding transportation in March rose by +0.4%. Expectations for an increase in today’s factory orders report are based in part on the already-reported news that March durable goods orders rose by +0.7% although durable goods orders fell by -0.2% ex-transportation.
The factory orders data has already improved substantially in recent months. The factory orders ex-transportation series on a month-on-month basis has risen in five of the last six months. On a year-on-year basis, factory orders rose to a 2-1/2 year high of +7.3% y/y and factory orders ex-transportation rose to a 5-1/4 year high of +7.5%. The improvement in factory orders is a welcome development, particularly since manufacturing sentiment data is falling back to earth. The ISM this past Monday reported that its April manufacturing index fell by -2.4 points to 54.8 and the new orders sub-index fell by -7.0 points to 57.5. Despite those declines, the indexes are still at relatively high levels that indicated firm manufacturing confidence.
