There seems to be some discord in the Federal Open Market Committee (FOMC). Let the battle begin!
Several members of the FOMC came out two weeks ago as proponents of a rate hike as soon as April, five to be exact. They are firmly in belief that the economy is trending strong enough to withstand a rate hike. The economic conditions are as such that inflation has become more of a concern as employment has reached a healthy level. As employment increases and wages do the same, the likelihood of inflation becoming more of a problem increases.
Last week the Chairperson, Janet Yellen, put everything in check as she was decidedly dovish on the matter. She made it very clear that concerns over the slowing global economy are impacting the decision to hold back on any immediate action. It is feared that the slowing global economy will spill over to the U.S., which it already has. The message is being sent that inflation slightly above their 2% mandate is acceptable if it prevents our economy from sliding into a recession. Interestingly enough a Hawkish stance is allowing the global slowdown to spill into the U.S.
US Data
The week was light in general for data however Friday did not fail to deliver. The jobs report came out with a healthy 215,000 jobs added in March. The actual unemployment rate increased to 5.0% from 4.9% in February. This was actually good news as the participation rate increased to 63%[1]. This reflects optimism about the job market as potential employees join the workforce.
Beyond the jobs report the big piece of economic data came from ISM manufacturing, as it pushed back into expansionary territory for the first time in 6 months[2]!
International Data
Manufacturing data for the Eurozone firmed as well. Much of the focus of the week was on FOMC comments which helped the Eurozone rally as well.
In addition to the Eurozone and U.S. manufacturing picture improving, China did as well. This improvement in manufacturing has been largely attributed to central bank stimulus.
Conclusion
Attending to global concerns and letting our economy run a little hot is not a bad thing. Being Hawkish with rates strengthens the dollar and makes profits for large multinational companies diminish. If someone in Paris bought a Big Mac for €4, two years ago, it would come back to the U.S. as $5.44. As the $ has strengthened over the last few years that same €4 Big Mac comes back as $4.48. I’m not sure, but I have to imagine they weren’t selling too many Big Mac’s in Paris anyway… You get the point!
Bottom-line the FOMC Chair is being dovish in an attempt to level the currency playing field and keep the U.S. in a competitive stance in the global market place. Doing so will allow our economy to regain footing, oil prices should firm, and the fears of a recession should become less prevalent.
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[1] www.investing.com – economic calendar
[2] www.mfs.com – week in review