Bullish Economic Update Ahead Of June FOMC Statement

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Includes: FORX, UDN, USDU, UUP
by: FX Analyst

Summary

This is the latest economic update before the June FOMC statement tomorrow.

We have better than expected producer price index, consumer and house builder confidence on the back of a stronger economy.

Strong USD pulled down industrial production and capacity utilization marginally but the overall trend remains bullish.

USD bottomed out ahead of the June FOMC statement but expected to strengthened after it.

Tomorrow is the day which we have all been waiting for and that is the June FOMC statement to be announced on 17 June 2015 at GMT 10:00 hours. By the time you read this article, the 2 days FOMC meeting would be well underway. This article seeks to bring you up to date with the latest economic data up until June 15 which would the data used by the FOMC to formulate its economic assessment of the U.S. economy.

This would also form the basis for their decision on the historic rates liftoff since the bold monetary easing policy in 2008. While it is highly unlikely that the FOMC would deliver the liftoff tomorrow, they can set the stage and firmed up expectations for September rates liftoff.

Good News For Fed's Inflation Mandate

We shall start with the producer price index (PPI) which was released by the Department of Labor ((DoL)) on June 12. The PPI grew by 0.5% in May and it reversed the 0.4 contraction in April. Furthermore it exceeded expectations of a 0.4% increment. The DoL indicated that rising fuel price accounted for the positive inflation figure in May. This supports the assertion by the FOMC leadership that the recent inflation weakness is due to the transitory impact of lower energy prices.

This forms part of the mandate for the FOMC of stable price which is defined as inflation of 2%. When producer experiences greater input prices, they would pass on this increase to their end consumers. Still, a single month of data would not make a strong case for inflation and it is likely to require more months of positive inflation data.

Strong Sentiments From Consumer And House Builders

Next we have the all important consumer confidence survey for June 2015 as conducted by the University of Michigan. It had risen to 94.6 in June from 90.7 in May as consumers expect the largest wage increases since 2008. Consumers are also expected to take advantage of the current low interest rates environment to increase their purchases.

Source: UoM

Across different components of consumer confidence, we can see strong monthly improvements. This consistent monthly improvement added up to the strong yearly gains in consumer confidence. May's consumer confidence was also revised up from 88.6 to 90.7 and it removed the scare of weakening confidence last month.

While the consumer confidence index can have its volatile moments, the overall recovery since 2012 is clear in the chart above especially since the low of 54.9 in August 2011. We have had news of the strengthening housing market in the past few months from both government and private sectors.

On June 15, another housing association, announced good news about the state of the U.S. housing market. The National Association of Home Builders (NAHB) reported that builder confidence rose to a new high for June 2015. Home builders expect greater current and future home building momentum.

Slightly Weaker Industrial Production

However it is not all good news. The Federal Reserve monitored industry production and capacity utilization as a gauge of the economic performance. Industrial production fell by 0.2% in May and capacity utilization fell by 0.2% from 78.3% to 78.1% in May.

Source: Federal Reserve

The current weakness in industrial production was due to the impact of the strengthening USD which reduced overseas demand. In addition, the rationalization of the energy sector continued to weigh on industrial production. However the chart above shows that this dip is minor continued to the overall bullish trend of industrial production.

Conclusion

The overall economic condition prior the FOMC meeting remains bullish. My expectations remains that the FOMC would set the stage for an eventual rate hike in September 2015 based on the current set of economic conditions.

The USD is currently awaiting the results of the June FOMC statement on June 17. This can be seen in the bottoming out of the PowerShares DB USD Bull ETF (NYSEARCA:UUP) chart above and my expectations would be for it to strengthen after the statement is released.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.