Weak US Data Adds to Pressure on USD

US stocks are trading mixed while Treasuries rallied a few basis points across the curve as investors digested the latest batch of disappointing economic data.  The number of Americans filing applications for unemployment benefits rose last week, while a separate report showed a 218% jump in announced job cuts by US employers in January.  The two reports indicate momentum in the labor market may be waning just one day after a report showed the US service industries grew at the slowest pace in two years last month.  Weekly jobless claims have been trending higher since reaching a forty year low of 255,000 last July, but week-to-week volatility is to be expected following the holidays.  The surge in corporate layoffs led by the retail and energy sectors, however, has the potential to spill into other sectors of the economy.  In a separate report, the Commerce Department said that factory orders fell 2.9% in December, the largest drop in a year, after declining 0.7% in November.  Negative sentiment from the disappointing reports caused the US dollar to extend its losses on the week.  The dollar is down 3% in just the first 4 days of February, on pace for its worst weekly performance since May 2009.

Several Fed officials have recently acknowledged the potential need to adjust their policy outlooks in light of recent domestic and international data and heightened market volatility.  As a result, trading in Fed Funds futures currently imply no further rate hikes until middle of 2017, despite the most recent Fed projection of four hikes in 2016.  New Dallas Fed President Kaplan seemed to support the market’s recent movement by saying “this is a time for patience and analysis, and really assessing data, because there has been some slowing”.  Kaplan’s comments come a day after Fed Governor Brainard called for “watchful waiting” due to potential spillover from stresses in emerging markets.
 
Despite recent comments from central bank officials, both Goldman Sachs and PIMCO told clients that bond markets are currently underestimating the Fed.  Both firms believe bond yields are poised to rise as US fundamentals remain generally intact, and that traders shouldn’t write off hikes this year.