The US dollar extended its recovery that began on May 3.  Its technical condition remains constructive, even though up until now, the gains are still consistent with a modest correction rather than a trend reversal.  

The details of the employment report, if not the headline, coupled with the 1.3% increase in retail sales, have boosted confidence that the US economy is rebounding in Q2 after a six-month slow patch. The average of the Atlanta Fed (2.8%) and NY Fed GDP trackers (1.2%) is 2%, and that is considered trend growth.  

The April FOMC statement recognized that the strength of the labor market was generating domestic demand. The retail sales report changes that assessment, and revisions from Q1 suggest consumption was not quite as weak as earlier estimates indicated. More favorable data is likely in the week ahead in the form of April industrial production, manufacturing output, and housing starts. The May Philly Fed manufacturing survey is expected to increase.  

However, this has not resulted in a change of investors’ views on Fed policy or inflation expectations. The Fed funds futures strip implies a 20% chance of a hike at either the June or July FOMC meetings. The market’s skepticism about a hike has not been this great in a couple of months. 

The gap between the market and economists has been an important talking point this year, but the Wall Street Journal survey found convergence. For the first time since February, a majority of economists do not expect a hike at the June FOMC meeting. A little more than half see a hike in either June or July. Three-quarters of economists surveyed in April thought a hike was likely in June. There is a greater appreciation for the potential disruption of a Brexit decision several days later.

Investors would be more confident of the durability of the dollar’s recovery if it were supported by changing expectations for higher US interest rates. Stronger economic data alone seems insufficient. The April CPI, due out Tuesday, is unlikely to do what the strongest retail sales report in a year was able. The headline may rise due to gasoline prices, but the core rate is expected to tick down to 2.1% from 2.2%. 

The risk is that the April FOMC minutes are more hawkish than the FOMC statement. Recall in March several governors were playing up the possibility of an April move but were shot down by Yellen at the NY Economic Club at the end of March. The market may have a knee-jerk reaction but look past it as the Fed’s leadership mostly drives policy.