The US dollar has pulled back amidst the release of broadly disappointing US economic data, as we start to see fundamentals play a role in the forex markets once again. Personal spending in the US contracted by the most since September 2001 at a rate of 1.0 percent, despite a 0.3 percent rise in personal income, as consumers opt to save or pay off debt.
Meanwhile, US durable goods orders dropped a whopping 6.2 percent during October, marking the third consecutive contraction and worst decline in two years, and even excluding transportation, orders fell by the most since 2002. Furthermore, non-defense orders excluding aircraft also tumbled for the third straight month at a rate of 4 percent, suggesting that business investment is slowing dramatically.
Overall, the data suggests that consumption is falling rapidly, as we’ve already seen reflected in the Q3 GDP figures, and with the labor markets and housing sector still deteriorating and credit conditions remaining tight, consumer spending could easily take a toll on Q4 GDP figures as well. In light of this, businesses are cutting back on spending and investments as well, since both domestic and foreign demand are sure to slow further in coming months. This leaves the Federal Reserve very likely to cut rates again when they meet on December 15-16, especially as fed fund futures are fully pricing in a 50bp cut to 0.50 percent and a 36 percent chance of a 75bp reduction. Related Article: US Dollar Tumbles as Q3 GDP Falls 0.5% Amidst Sharpest Contraction in Consumption Since 1980 US Personal Spending (Monthly) Source: Bloomberg