US economy rebounding in Q2 – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has remained on a firmer footing in the Asian trading session with dollar index having fully retraced the sharp sell off from late last month.

Key Quotes

“The recent rebound for the US dollar was reinforced by the release on Friday of the stronger than expected US retail sales report for April and University of Michigan consumer confidence survey for May which both provided evidence that consumer spending is likely to strengthen after the softer start to the year. The retail sales report revealed that control retail sales rebounded robustly by 0.9% in April following an upwardly revised expansion of 0.2% in March. The three-month average annualized rate of expansion for control retail sales accelerated to a robust 3.9% in April. There was broad-based strength in the report with eleven out of thirteen categories of spending increasing during the month. The early timing of Easter this year has likely contributed to volatility in spending in recent months. The underlying trend still remains solid supported by the improving labour market.

It was also encouraging that the University of Michigan survey revealed that consumer confidence rebounded more sharply than expected in May signalling that the outlook for spending is brightening if sustained. The expectations component increased sharply by 9.9 point to 87.5 in May reaching its’ highest level since July. It has responded with a lag to the marked improvement in US financial conditions which have eased in recent months to their loosest level since prior to the min-devaluation of the renminbi during the summer of last year.

Taken together the retail sales report and University of Michigan survey appear consistent with consumer spending growth accelerating back towards an annualized rate of around 3% in Q2. A return to more solid consumer spending growth would leave the US economy better able to withstand external headwinds to growth.

However, the US interest rate market still remains unconvinced that the Fed will resume rate hikes this year dampening support for the US dollar in the near-term from the encouraging US economic data releases. San Francisco Fed President Williams (a non-voting member) was speaking over the weekend and stated that the Fed shouldn’t be overly nervous about surprising the market. He continues to believe that the US economy is doing well and that 2-3 rate hikes this year still make sense as he is weighing the FOMC options for the June, July, and September policy meetings.

The release this week of the latest FOMC minutes from their April meeting will be closely scrutinised for any fresh insight into how close the Fed is to resuming rate hikes. The overall tone of the minutes should be less dovish signalling less concern over downside risks from global and financial developments.”