Extremely weak macroeconomic reports from the United States did not prevent the US currency from adjusting for the entire market. The dollar index moved away from local minima, reflecting the increased interest of dollar traders. The immediate reason for the growth of the dollar was the comments of the Fed representatives, who leveled investors' concerns about an aggressive reduction in the interest rate. However, this price movement must be treated with some caution despite some recovery of the American currency. The market actually ignored yesterday's macro reports while they signal quite alarming trends.
First of all, we are talking about the indicator of consumer confidence in the US. Contrary to the forecast of growth to 132 points, this indicator fell to 121.5 points, which has been the weakest growth rate since September of the year before last. Moreover, according to experts, this is the strongest monthly drop in the index over the past four years that indicates a one-time decline for almost 10 points. According to analysts, this is a response of Americans to the actions of US President Donald Trump, who not only aggravated relations with China last month but also initiated trade conflicts with Mexico and India. Although the last two states did not aggravate the conflict, residents of the United States still responded to the increased uncertainty.
Here it is worth recalling Nonfarm, which showed a slowdown in the labor market. Last month, only 76 thousand jobs were created, whereas previously this figure ranged from 170 to 330 thousand (in particular, in April the American economy created 225 thousand jobs). The unemployment rate is still kept at record-low values but this indicator is a "lagging" economic indicator. Hence, this fact serves as a weak consolation for dollar bulls. Also, there is an extremely weak growth in the average hourly wage given this level of unemployment. All of these are reflected in the dynamics of inflation.
Thus, core inflation in May with the consumer price index, excluding prices for food and energy, remained at the level of 0.1% on a monthly basis. At this level, the indicator has been released for the past four months. In annual terms, the index came out at a two percent level although experts expected growth to 2.1%. The index went below this value only in February last year. The general consumer price index was also in the "red zone", both in annual and monthly terms. Meanwhile, the consumer price index rose in May by only 0.1% m/m and 1.8% y/y, while analysts expect to see CPI at the levels of 0.2% and 1.9%, respectively.
Other indicators show a slowdown in the US economy, for example, in the housing market. At the end of last month, sales of new buildings in the States decreased by almost 8%. The figure published yesterday showed a decline for the second month in a row in April as sales of new homes fell by 3%. It is worth noting that experts predicted the growth of the indicator in April and in May but the real figures did not coincide with the expectations of analysts. By the way, this dynamic is also due to the trade war between the United States and China. The growth of duties on Chinese materials led to an increase in real estate in general while the purchasing power of Americans decreased respectively. Obviously, a further slowdown in the US economy will further constrain the demand for new buildings, reducing the performance of the housing market.
Yesterday it became known about the decline of another macroeconomic indicator, particularly the index of business activity in the manufacturing sector of the Richmond Federal Reserve Bank based on a survey of manufacturing companies in the region. This is a secondary indicator but the dynamics of this index looks significant against the background of slowing down of key indicators. After the February maximum of 19 points, it slowed down to three points in June. The structure of the indicator suggests that the component of average employment during the working week and the component of wages have decreased most strongly. In other words, inflation components slowed down first of all, which indirectly affect the overall inflation rate in the country.
Despite such a "bunch" of alarm signals, the market yesterday chose to focus on the words of James Bullard and Jerome Powell. The head of the Fed said that the American regulator is still thinking whether to lower the interest rate or not. Given the fact that the market assesses the likelihood of such a move at 100%, these doubts have provided significant support to the US currency. Followed by Powell, James Bullard, who is famous for his "dovish" position, also spoke stating that a one-time rate cut of 50 basis points is a "bust". In his opinion, this scenario is unlikely to come true. Although, he said that the "standard" rate cut by 25 bp is a reasonable step.
Thus, after yesterday's speech by the Fed Chairman, traders again doubted that the American regulator would lower the interest rate at the next meeting. This fact gave strength to dollar bulls, including the major pair with the euro. In my opinion, this is a temporary phenomenon since the deceleration of key indicators of the American economy "cannot be hidden under a carpet", figuratively speaking. Therefore, the temporary strengthening of the dollar should be treated with caution, although the price may rise in the near future before the establishment of the 13th figure in conjunction with the euro/dollar.