William Dudley, President of the New York Fed and vice-chair of the FOMC, gave some support to the US dollar yesterday by claiming improvements in the US labor market will eventually lead to higher inflation and expressing support for a 2015 rate hike should the economy proceed as expected.
By Peter Martin
Friday, October 16, 2015
‘I see more pressure on resources,’ Mr Dudley, a voting member of the FOMC, said following his speech at the Brooking’s Institution in Washington yesterday. ‘I see a linkage between pressure on labor market resources and my confidence in inflation.’ He also stressed the importance of public expectation for the FOMC’s future action, which he said depends on policymakers acting ‘in a systematic and consistent manner’. Given that the Fed has consistently signposted a 2015 rate hike (the minutes from the most recent FOMC meeting, for example, noted that ‘most participants continued to anticipate that, based on their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year), this can be seen as implicitly backing the case for lift-off this year.
The dollar made broad gains in early trading on Friday: the dollar index, a measure of the US dollar’s strength against a basket of six major currencies, rose 0.26%, EUR/USD fell 0.22% to 1.1359 and GBP/USD fell 0.13% to 1.5448.
Also boosting the dollar was some better than expected data from the industrial sector. Though the Fed’s monthly industrial production report still showed contraction, the pace was slower than anticipated and there was a healthy upward revision to August’s level. The industrial production index fell 0.2% in September, versus a consensus estimate of -0.3%, while August was upwardly revised from -0.4% to -0.1%. Capacity utilization edged down from 77.8% to 77.5%. The manufacturing component of the index shrank just 0.1% (versus an expected 0.2% fall) and August was revised a tick higher to -0.4% from the originally-reported change of -0.5%. Overall the industrial sector is struggling, but is not doing quite as badly as had been feared.
We saw yesterday that jobless claims are at extremely healthy levels, with last week’s initial claims matching a 42-year low set in July. It seems unlikely that the Fed would make a move to tighten in October without having a chance to see if this strength is reflected in October’s employment report (released in three weeks, which will come too late for the October FOMC meeting), but healthy payroll growth in October and November, along with signs of firming inflation might be enough to provide a case for tightening at the December meeting.
The US dollar also appreciated against its Canadian counterpart, rising 0.25% to 1.2895, despite Canadian manufacturing sales coming in slightly higher than anticipated for August. Monthly sales fell 0.2%, versus a consensus estimate for a 0.7% drop, following July’s unrevised 1.7% jump. Year-on-year, manufacturing sales improved to +0.6% from July’s -2.7%. Volumes remained fairly stable, and the drop in the headline level was largely driven by sharp declines in the price of coal and petroleum. Falling commodity prices continue to plague the sector, but the decent performance compared to expectations may spark some hopes that the worst has passed.
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