After last Friday’s jobs numbers didn’t provide much guidance, a lot more is riding on Wednesday’s US February CPI report. Traders remained worried about how the trade war will affect the economy, which has contributed to a weaker dollar of late. An unexpected result in the consumer prices numbers could provide some clues as to when the Fed will give the economy a boost.
Fed Chair Jerome Powell told Congress that interest rates would likely stay pat until there was a change in the inflation and jobs trends. Friday saw 151K jobs added, which was an improvement over the 125K in January. But it was short of the 159K that was the market consensus. The unemployment rate ticked up, but average hourly earnings were lower. Overall, it was a mixed result. And with no signs of a major change in the labor dynamics, markets will have to hope for a change in the inflation situation to see if there is any change in the outlook for the Fed.
Where the Forecasts Are Pointing
As it stands, the chances of a rate cut in June are slightly in the majority, which is essentially unchanged from before the US February CPI data was released. Investors are apparently expecting inflation to come down slowly over the next few months, and justify the Fed easing.
But what’s also on an increasing number of investors’ radar are signs of a slowing US economy. That the jobs numbers were essentially middle of the road provided a relief rally initially, with the stock market initially rising. The dollar was able to benefit from that, gaining on Monday as well. That suggests there was enough concern about a potential economic correction that it could move the markets.
The Numbers that Matter
The consensus among analysts projections suggests that US February headline CPI will tick down to 2.9% from 3.0% prior. This is in line with forecasts from the Fed that suggested a bump up in inflation through the winter that would settle down in the first half of the year. It’s still above the 2.0% target, but trending in the right direction for the Fed to ease.
A similar scenario is expected from the core rate, which is more closely followed by policymakers. The annual core rate is expected to dip to 3.2% from 3.3% prior. Naturally, a larger than expected reduction would likely improve the odds that the Fed will move towards easing sooner. That could mean that the dollar resumes its downward trajectory, after hitting 4-month lows last week.
Trade, Economy and the Dollar
Typically, the imposition of tariffs means the currency gets stronger, as it means the country will be spending less of its own money on imports. However, that supposes the economy keeps functioning at the same rate. Now investors seem to be worried about a potential correction if not outright recession as a result of the tariffs and reduction in government spending. That would instead undermine the value of the currency.
Over the weekend, US President Donald Trump gave an interview in which he expressed some hesitation about the potential economic impact of the tariffs. That the otherwise economic cheerleader of the US didn’t rule out a recession appears to have hurt investor sentiment at the start of the week.