September 25, 2023

USD Rebounds Strongly: US Economy Shows Signs of Recovery Despite Decreasing Consumer & Producer Price

USD Rebounds Strongly After FED Meeting

The US dollar has been upward since the Federal Reserve’s meeting on February 1st, reaching new highs not seen since early October. This rebound can be attributed to several factors, including a massively positive jobs report, a sharp uptick in the January ISM, and the easing of COVID-19 restrictions in China.

The two-year yield, considered a reliable indicator of the economy’s strength, has risen from 4.0% to 4.5% in the last four months. This yield and the dollar’s progress towards the Fed’s target rate of 5.25% contribute to its surge in value.

This week, more economic data will be released, with the UK and the US releasing their Consumer Price Index and the Eurozone releasing their estimates for the fourth quarter GDP and industrial output numbers. These updates are expected to provide further insight into the state of the economy and could significantly impact the dollar’s value.

United States Economy Shows Signs of Recovery

After a difficult year in 2022, during which the US economy saw a sharp decline in manufacturing output and retail sales, with a drop of more than 1% in December 2022 alone, January saw a positive shift in these two key sectors. The auto industry experienced a strong rebound, with sales surpassing analyst predictions and reaching a pace of 15.74 million units, the highest since early last year.

In addition, while the control used in GDP models, which excludes autos, gasoline, food, services, and building materials, increased for the first time since November, the housing market showed further signs of recovery. Mortgage rates have risen 19% since last year’s lows, and 30-year average rates have fallen to approximately 6%.

This renewed confidence in the economy has boosted consumer and business morale, and experts are projecting continued growth in the coming months. Moreover, due to the easing of Covid-19 restrictions in China, the US economy is expected to continue its path toward recovery and reach pre-pandemic levels soon.

Retail Industry Demonstrating Recovery Despite Drop in Consumer & Producer Rates

The retail sector in the US is beginning to recover in early 2023. However, the prices of both consumers and producers have been decreasing. In the past, the US Consumer Price Index (CPI) has grown by 0.6%, 0.8%, and 1.2% in the year’s opening quarter, but it is now analysts anticipate it to decline.

In 2022, the CPI saw an annual growth rate of 10% in the initial two quarters, but it slowed to a 2% annual rate in the latter half of the year. The question remains as to how much of the price increase was temporary. In addition, the basket used for calculating the CPI has been altered, granting greater significance to owner-equivalent rents and less to used vehicles.

If the CPI were to grow by 0.5% each month in the first quarter of 2023, the year-over-year rate would reach around 5% in March.

The median forecast for the end-of-year CPI is 3.8%. The same applies to the Personal Consumption Expenditures (PCE) deflator. The Dollar Index has reached its aim and is expected to keep rising, potentially reaching 105.00. This further fortifies the US economy, exhibiting indications of recovery and expansion, despite the decrease in consumer and producer prices.

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