Today's U.S. economic reports were not nearly as important as yesterday's retail sales report but currency traders have taken to the data very positively. Renewed strength in the housing market and growing inflationary pressures helped to lift the dollar against all of the major currencies. Construction companies restarted their projects after the holidays, lifting housing starts by 14.6 percent. There was a sharp uptick in building permits at the end of the year and accompanying rise in starts last month shows that builders are moving forward on their projects.
The NAHB housing market index has not budged for the past 4 months, but the sharp 77.7 percent rise in multi-family housing starts indicates that builders are growing more confident. Single-family starts actually declined by 1.0 percent. Building permits fell 10.4 percent last month after a very strong December - the pullback was marginally better than the market had anticipated. Inflationary pressures are on the rise according to the latest producer price report. PPI rose 0.8 percent which was slightly less than the downwardly revised 0.9 percent growth seen last month. However core prices, which excludes food and energy costs rose 0.5 percent, which was the largest gain since October 2008. Considering the sharp increase in import prices, we were a bit disappointed by the rise in the headline PPI number, but nonetheless the data still shows growing price pressures. On an annualized basis, PPI growth slowed to 3.6 from 4.0 percent while core PPI growth accelerated to 1.6 from 1.3 percent. The industrial production report on the other hand was not nearly as encouraging as the other data. Manufacturing activity fell 0.1 percent after growing 1.2 percent the previous month. Capacity utilization also declined slightly from 76.2 to 76.1 percent. Although this report is somewhat discouraging, as long as the regional surveys show continued strength, manufacturing activity will not prevent the dollar from rallying.
The Federal Reserve may not have seen these latest numbers when they met back in January, but based upon these reports, policymakers should feel more optimistic about the outlook for the U.S. economy and more comfortable with inflation. One of the most beleaguered parts of the U.S. economy is slowly recovering and price pressures are muted for the most part.
Will FOMC Minutes Show Discord Within the Fed?
The minutes from the January FOMC meeting will be released this afternoon and the tone of the minutes could have a meaningful impact on the dollar. The greenback hit a year to date low after the FOMC meeting and there is speculation that the minutes from that meeting could show more discord within the central bank which would be positive for the dollar. In January, every one of the FOMC members voted to keep monetary policy steady but recent comments from Fed Presidents suggests that not everyone supports continued stimulus. The dollar should rise if the minutes show increasing discord within the central bank that suggests more vocal opposition to continued Quantitative Easing in the coming months. The Federal Reserve has a big decision to make over the next 2 meetings and we would be surprised if they have not started the discussions already. Based upon this morning's reports, asset purchases may not be needed beyond June but the decision is not so easy because consumer spending and job growth remains weak.