Tags: investors | dollar | strength | patience

Investors Must Be Patient for Dollar to Weaken

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Thursday, 07 March 2019 11:19 AM Current | Bio | Archive

The Federal Reserve’s Beige Book, which is an economists’ gossip magazine of anecdotal evidence from the real world, which was released yesterday showed the U.S. economy continues to be performing quite strongly.

Manufacturing was stronger, employment remains strong across the economy, but bad weather and bad politics have taken their toll. On the latter, half of the reporting areas said that the government partial shutdown had been hurting local growth.

About the tightness in the labor market, the Fed's Beige Book reads: “Labor markets remained tight for all skill levels, including notable worker shortages for positions relating to information technology, manufacturing, trucking, restaurants, and construction.

Contacts reported labor shortages were restricting employment growth in some areas. Wages continued to increase for both low- and high-skilled positions across the nation, and a majority of Districts reported moderately higher wages.”

Yes, the tightness of the labor market has now reached a level where it may be limiting growth as well. There are simply not enough workers to hire to do the jobs that need to be done. 

Overall, this is consistent with an economy that should “stabilize” once politics and climate are more stable. Indeed, if anything, the tone was perhaps slightly more positive than might have been expected. 

Fed President Williams, who could be considered to be the leading economic voice on the modern FOMC reiterated yesterday in a prepared sppech the “patience-line” that has become such a key phrase for the current Federal Reserve.

In his speech, he said: “So what does the future hold? With a strong labor market, moderate growth, and no sign of any significant inflationary pressures, the baseline outlook is quite favorable. The base case outlook is looking good, but various uncertainties continue to loom large. Therefore, we can afford to be flexible and wait for the data to guide our approach.”

That too is consistent with the economic picture of the Beige Book as patience, once the temporary distortions fade away, is a perfectly reasonable response to the current U.S. economic situation.

Besides all that and what may turn out to become one of the more important focal points for the Fed this year is corporate pricing power.

There has been mixed evidence about the ability of firms to pass on higher costs to their customers with tighter labor markets putting pressure on labor costs, the battle between higher inflation and squeezed profit margins has begun. Squeezed profit margins are the more probable victim, at least for the time being.

Investors can, in my opinion, expect further dollar gains over the near term.  In the meantime, the DXY dollar index has risen above the 97 handle.

Today we got also the U.S. nonfarm business sector labor productivity data that increased 1.9 percent, output increased 3.1 percent and hours worked increased 1.2 percent in the fourth quarter of 2018.

Unit labor costs in the nonfarm business sector increased 2.0 percent in the fourth quarter of 2018, and increased 1.0 percent over the last four quarters.

These are still good numbers.

ECB has left all rates at record low with main refinancing at 0.0 percent and deposit rate at -0.40 percent.

Quarterly targeted longer-term refinancing operations (TLTRO-III) that should help to preserve “favorable” lending conditions will start in September 2019 and end in March 2021. The ECB sees rates on hold at least through 2019.

The ECB has also cut its inflation (CPI) forecasts for next 3 years. It expect 2019 CPI at 1.2 percent vs. 1.6 percent previously, 2020 at 1.5 percent vs. 1.7 percent and 2021 at 1.6 percent vs. 1.8 percent.

The euro fell to below the $1.13 per euro handle on the news while the first support level is at $1.1230-50. The euro should weaken further over the near term.

People who were waiting for a weaker dollar will have to wait a little bit longer.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The Federal Reserve’s Beige Book, which is an economists’ gossip magazine of anecdotal evidence from the real world, which was released yesterday showed the U.S. economy continues to be performing quite strongly.
investors, dollar, strength, patience
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2019-19-07
Thursday, 07 March 2019 11:19 AM
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