The Federal Reserve has made it clear that the position is data-dependent

David Sloan, Senior Economist at 4Cast, on US economy and Greenback

Taking into account the Dollar itself, a stronger US currency is weighing somewhat on manufacturing data and exports, impacting the US equity markets.

Unemployment benefits tumbled the most in 15 years and the labor market has strengthened over the past four weeks, despite the cooling hiring level. As a matter of fact, non-farm payrolls increased by only 126,000, together with the weak consumer and business spending. How do you evaluate the US business activity and its labor market? Do you think that such a steep slowdown in job growth could be temporary?

I think the underlying picture for the US economy is quite strong. Yes, we did see a disappointing payroll report for the month of March; however, we feel that, to a large extent, this reflects bad weather in late February which probably came too late to be included in the February payroll survey. As a matter of fact, the initial jobless claims spiked up during the same period and were quite high amid the four-week average. Since the last survey, the initial claims four-week average has moved down significantly, which suits well for the April employment reports.

Overall, we feel the US economy will definitely be regaining some momentum over the coming months after being depressed by the bad weather in the first quarter. Therefore, we suppose that such a steep slowdown should be temporary. The initial jobless claims are already giving positive signals for the month of April. Moreover, we also expect March retail sales to show some recovery from the weakness we have seen in the preceding months and that should continue into the second quarter with consumer disposable income being lifted by the decline in oil prices.

Taking into account the disappointing U.S. jobs growth, manufacturing activity and retail sales, investors are becoming skeptical about the June interest rate hike. What in your opinion is the earliest time for the Fed to tighten policy? How can the stronger Dollar impact US equity markets?

I do not think that the June interest rate hike possibility should be completely excluded yet. The estimates have been disappointing, which does bring some doubt. If the numbers continue to be unpromising through the second quarter, the Fed would likely pause the intention to hike the rates. However, if we get a strong pick-up in economic data during the next couple of months, the June rate hike is still possible.

The Federal Reserve has made it clear that the position is data-dependent. Thus, if the data will be fairly strong, they could tighten the policy as planned. Taking into account the Dollar itself, a stronger US currency is weighing somewhat on manufacturing data and exports, impacting the US equity markets. However, some of the weakness in the recent manufacturing data may also have been exaggerated by labor disputes on the West Coast ports which hurt exports.

We foresee that the EUR/USD will eventually meet the parity level in three-month time.

Generally, US equity markets can manage moderate gains if in the economic data improves in the up- coming months.

Where do you see EUR/USD and GBP/USD for the end of the second quarter?

We foresee that the EUR/USD will eventually meet the parity level in three-month time. As for the GBP/USD, it will supposedly reach the 1.4195.