US economy data will not deter stimulus cuts

US economic output for the period of January to March came in last week at a dismal 0.1 per cent, far below expectations of 1.2 per cent, and below the previous reading of 2.6 per cent.

Last month the Dow Jones Industrial Average approached record highs, yet it lacked conviction given the rather uninspiring run of US data, which does not lend much confidence in the economic recovery.

US economic output for the period of January to March came in last week at a dismal 0.1 per cent, far below expectations of 1.2 per cent, and below the previous reading of 2.6 per cent. Analysts were quick to blame one-off factors such as the weather for the slower reading. However, a closer look at the number would suggest that the reading was not as poor as it would initially suggest.

Personal consumption, perhaps the single most important part of this reading came in at a robust 3 per cent. Despite the drawdown in US exports and inventories, the stronger consumer demand makes the report look not so bad. Payroll data from April looked good on first sight; there were 288,000 new jobs added, well above expectations and well above the previous month, when 203,000 jobs were added.

While the unemployment rate fell to 6.3 per cent from a previous reading of 6.7 per cent, these improvements were made on a deteriorating labour force participation rate. With more and more people dropping out of the labour force, the more skewed the unemployment rate tends to be. During April, a massive 800,000 abandoned the labour pool – people retiring, quitting or losing their jobs or people simply losing interest in looking for work. As a result, the labour force participation rate fell to 62.8 per cent, its lowest level in more than 35 years.

It is difficult to claim that the widening in the participation rate is a result of the government programmes that extended benefits to the unemployed, as we saw improving participation rates during January, February and March. A more realistic cause could be that as the ageing baby boomer generation retires, it is resulting in a large decrease in the overall size of the US labour market.

The silver lining, of course, is that all this is cyclical. Once the current retirement cycle is complete, the unemployment rate will not be so sensitive and skewed.

At this rate, the Federal Open Market Committee (FOMC) will continue its current course of fiscal stimulus tapering, as the data is not bad enough to warrant a reversal. Inflation remains well under the 2 per cent target and with employment figures, solid manufacturing and service numbers, the FOMC is unlikely to veer from its current course.

Gold continued to consolidate between US$1,280 and $1,300 an ounce in April as the ongoing developments in Ukraine seem to be more priced in by the day. Gold has struggled to gain any traction above $1,300, and sluggish demand in the physical markets has much to do with this. Data showed that gold imports in India, which is the second largest consumer of bullion, dropped 74 per cent last month from a year ago because of larger government import restrictions.

With Ukrainian issues becoming more and more localised, gold prices will come under pressure, particularly with slowing demand and slowing inflation also working against the precious metal. The yellow metal will continue to find stiff resistance in the channel between $1,310 and $1,330, a breach of which would find its next resistance at $1,380 levels.

Indian markets continued to post solid gains over the past month, as exit polls continued to exude confidence that the Bharatiya Janata Party was close to a majority in the election that concluded on Monday. The Indian rupee hovered at 60 against the US dollar where it found stiff resistance. However, an expected BJP-led coalition will no doubt improve the prospects of the currency, and it should test the 58 channel over the course of the next few weeks.

Gaurav Kashyap is the head of futures at Alpari ME

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Published: May 13, 2014 04:00 AM

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