Last week proved to be a challenging few days for the US stock market, as speculation that the Fed might be willing to hike rates as soon as June fed into a pattern of dollar strength and stock index weakness.
By Peter Martin
Monday, March 16, 2015
Under a day away from the start of the latest FOMC meeting, however, there is something of a reversal going in that trend, with the dollar easing against its commonly-traded peers and the Dow Jones boasting triple-digit gains.
By early afternoon in New York the dollar index, a gauge of the dollar’s strength against a basket of six leading currencies, was down 0.63%. Much of that was driven by the movement of the euro against the dollar. EUR/USD rose 0.95% to 1.0595, while GBP/USD advanced 0.61% to 1.4831.
This easing in the dollar has made US shares comparatively more affordable for foreign investment, helping to boost share prices across the board on Wall Street. The Dow Jones jumped 1.07% or 189 points to 17,938, moving back into black for the year, while the S&P 500 also enjoyed a big bounce, gaining 1.01% to 2074.2.
Economic data released today has been on the soft side, which may be playing a part in shaping expectations for the Fed meeting. Manufacturing conditions in the New York area have eased slightly this month, according to the latest survey by the New York Fed. The Empire State Manufacturing Index fell to 6.90 from February’s reading of 7.78, with the forward-looking component of new orders slipping into contractionary territory with a reading of -2.39, which raises concerns about future weakness. This is a disappointing early signal for how the manufacturing sector may be faring in March. The next indicator is on Thursday with the release of the Philly Fed survey.
The Fed surveys are based on anecdotal evidence, but hard data on the manufacturing sector for February was also disappointing. The manufacturing component of the Fed’s industrial production index fell 0.2% in February, while January was downwardly revised to -0.3% from an originally-reported +0.2%. Overall industrial production came in at a worse-than-expected +0.1% (and like manufacturing, January was revised down to -0.3% from +0.2%). Capacity utilization eased to 78.9% from 79.1% in January.
Unlike the services sector, manufacturing does not comprise a large part of the US economy but, like industrial production as a whole, it is procyclical and correlates closely with broad economic activity and the business cycle. Furthermore, capacity utilization has historically proven to be a useful guide of inflationary trends. With manufacturing dipping, and plants running at lower proportions of sustainable full capacity at a time when deflation is a concern, the Fed may be given pause for thought when it comes to the crucial wording of its forward guidance.
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