Dollars and Jobs and Rates, Oh My! Sound familiar? It’s not quite the “Lions and Tigers and Bears” that Dorothy, Scarecrow and the Tin Man sang as they daringly skipped through the Haunted Forrest toward the Emerald City, but you get the picture. During the month of March, the dollar continued to show strength, the labor market showed a sign of weakness, and the Fed was up to its usual pondering and pontificating on when to begin raising short-term interest rates, “Oh My!”
Let’s begin with the strengthening dollar, which presents a very interesting situation for the US economy. A rising dollar makes imported goods and travel abroad more affordable for us Americans. This is a great time to visit Europe or Japan. Conversely a strong dollar hurts US exporters (whose products are rising in price to foreign buyers) and US corporate operations located abroad, whose foreign currency earnings are worth less in dollar terms. The current fear is that the strong dollar will hurt US corporate earnings, which could hurt employment, which could hurt demand, which could hurt earnings, oh, my!
The March jobs report revealed an increase of only 126,000 jobs for the month and a downward revision in February’s number. This number was well below both last month’s revised 264,000 and March’s expected figure of 245,000. It was also the first time in 12 months that the jobs number was below 200,000. Average wages increased slightly for the month, but average hours-worked declined—basically offsetting each other. Unemployment held steady at 5.5%...not bad, if not for the participation rate falling to it lowest level since 1978 (Bloomberg). While lower oil prices help consumers’ dollars go farther, they are also leading oil and gas producers to cut their payrolls back to levels not seen since 2009. ADP reported that manufacturing payrolls dropped for the first time since July 2013. Oh, my!
As for rates, the Fed has said good-bye to patience. In its latest policy statement, the Fed removed the ever-important word “patient” from its language. In previous comments, Fed Chair Yellen had indicated that this could signal a rate hike as early as June. In a post speech press conference, however, she kept her options open, saying: “Just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient”. For the month of March the S&P index returned a very impatient negative 2.6%, reassessing the likelihood of a June rate increase. More recently Fed speakers have emphasized that they are still data dependent and could remain…hmm, let’s call it forgiving, easy-going, long-suffering…anything but patient. Oh, my!
So for the first quarter on 2015, three majors forces are competing for our attention. Any impact of dollar strength should be seen during first quarter earnings season, which begins soon. Future jobs numbers could reveal the beginning of a weakening trend or not. Interest rates could begin rising this year—maybe in June, maybe in September—although the Fed is reassuring market participants that it will be cautious in its approach. Now let’s bravely skip down the economic road, not hoping to see the Wizard, but looking for signs of continued growth. Dollars and Jobs and Rates, Oh My! Oh my, indeed.
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