The US dollar is slightly up in the morning as the market awaits tomorrow’s meeting of the Federal Reserve. However, the latest figures from the US economy were rather weak, which doesn’t bode well ahead of the central bank’s decision.

Let’s begin with the manufacturing sector. U.S. manufacturers scaled back hiring plans in April and demand for new products abated, but most companies said business was still quite brisk, a survey of executives found. The Institute for Supply Management said its manufacturing index slipped to 54.8 in April from 57.2. It also fell short of the 56.5 forecast of economists surveyed by Bloomberg.

 After a lull that lasted through 2015 and most of 2016, manufacturers have reported a sharp improvement in business. In March the ISM index hit a nearly three-year high amid optimism about the steps a pro-business Trump administration was taking to gin up the economy. source: Bloomberg

Now it’s time to move to the inflation data. The US Personal Consumption Expenditure (PCE) price index declined 0.2% for March following a 0.1% gain the previous month. The year-on-year rate declined to 1.8% from 2.1% and compared with an expected rate of 1.9%. The core PCE index fell 0.1% on the month which was in line with expectations and the year-on-year rate declined to 1.6% from 1.8%. The PCE data overall, however, is likely to increase doubts over underlying inflation trends and will tend to make the Fed more cautious surrounding raising interest rates again at the June meeting.

Although inflation was slightly lower than last month it didn’t derail the expectations of a rate hike as soon as June. source: Bloomberg

And finally the data on consumer spending. Personal consumption, a measure of what households spent on everything from groceries to dental care, was unchanged in March after a flat reading in February.That marked the weakest two-month stretch of spending in more than two years. That was also in line with a weak GDP print for the first quarter. 

Conclusion:

The Fed is expected to hold interest rates steady at its policy meeting this week but has indicated it will increase rates later this year if job growth remains steady and inflation shows signs heading toward its 2% target. Fed officials typically look at trends over months rather than focusing on a single month’s data. Figures from yesterday don’t support a hawkish stance, but if jobs growth remains firm and if inflation speeds-up next month, the central bank would probably raise rates for the second time this year in June.