No matter how the Fed looks at the economy, June hike remains off the picture

Outlook:

Housing starts and permits are hardly ever the catalyst for a currency rally, but everyone was so hungry for a change in perspective that traders and analysts over-reacted to the data yesterday. The WSJ reports economists are already boosting their Q2 forecasts based on this one number. Barclays raised the GDP forecast from 2.6% to 2.7%, Goldman, from 2.5% to 2.7% and Macroeconomic Advisers from 1.9% to 2%.

The real question is how much weight the Fed will place on housing starts, and we won’t get that from the April FOMC minutes due out later today. As we note above about the BoE minutes and sterling, context counts. If yesterday’s data had been gloomy, the interpretation of today’s minutes would proba-bly skew that way, too. Now everyone will be seeking some hint recovery and therefore hawkishness. It won’t be there, but that doesn’t mean people won’t detect it.

What we want to know is how the Fed views Q2. We heard from the San Francisco Fed, among others, that Q1’s lousy outcomes were aberrant and will be corrected in coming quarters. Is that the view of the majority of the members? Alas, we probably won’t get anything from the minutes that points to either June or September. At a guess, there is still an undertone of anxiety about the new normal and secular stagnation, even if Fed economists probably think those ideas are unfounded hogwash. The end-result is reluctance to act too soon and have to reverse course later on. No matter how the Fed members see the overall economy, that anxiety probably stays their hand, at least in June. And to bring up an old factor, wages are still stagnant and income inequality remains a Very Big Obstacle to robust growth, at least on the household side.

And big companies are sitting some $2 trillion in cash, evidently without a compelling motivation to spend it on new production or even research and development. Some skeptics in the equity space com-plain that the only real growth in the indices will come from buybacks and maybe M&A, not organic growth. We don’t know whether this is a sensible argument, but we do know this is not your grandpa’s recovery.

And that leads us to Japan, oddly enough. The Japanese economy always shows a good outcome in the first calendar quarter, so we are not impressed by that this time. Some years it’s stupendous numbers, like 5-7%. To attribute recovery to Japan because of the Q1 GDP is not a smart idea. To be fair, the job market is tightening. The FT reports “A near-record 96.7 per cent of Japan’s new university graduates have found jobs this year in a sign of the country’s tightening labour market. New figures released by the education ministry show a recovery in graduate hiring from the 2010 low of 91 per cent, during the deep recession that followed the collapse of Lehman Brothers.”

Well, good for Japan but let’s not count our chickens yet. This is one of the reasons we have been ne-glecting the yen of late. Good data, bad data—nothing seems to move the yen. Sometimes we get a slightly out-of-whack comment from an official and that has an effect, but if anyone knows what drives the yen (except carry trades), they are not telling. Even the chart is confusing. We can draw trendlines and channel whichever way we want and they look equally valid. That means no trendedness, so don’t bother. This time we got good GDP and a big rise in the Nikkei while the yen fell to 121 for the first time in several months. As we say in economics, bah. The range this year is 115.57 to 122.02, which would seem to offer some opportunities, but see the mini-chart. The yen is tangled up in a skein of con-flicting sentiments and going nowhere.

We do not expect the euro/dollar to get itself into the same kind of tangle, but at the same time, we would be wise to expect a period of consolidation starting sometime soon. Change the scale to hourly and the chart will look like the dollar/yen. The technicals are going to rule unless and until we get anoth-er Shock like the Coeure statement. It could be Greece, but don’t count on it. We expect the euro to slip and slide some more, but nerves are going to fray near key levels, including today’s 1.1060. Watch for choppiness.