Daily Market Pulse

Rise in U.S. consumer prices sparks inflation fears


Yesterday, the U.S. Dollar held on to its gains (+0.05%) against its peers in an extension of moves that started the day before with a higher-than-expected rise in U.S. consumer prices that sparked inflation fears. Meanwhile, equities also found buyers after a rough week in the stock market. Inflation expectations gained more forcefulness, as the U.S. producer price inflation also jumped in April. It rose to 6.2%, while core PPI inflation (excluding food and energy) increased to 4.2%. In addition, the U.S. initial jobless claims fell to 473,000 last week, which was more than expected, indicating that layoffs are at an all-time low. In other news, the worsening Israel-Palestine conflict is gaining attention as the death toll and devastation continues to rise.


The single currency rose 0.1% against the greenback, after finding some support from European yields. The 10-year yields across the bloc have been surging. Recently, moves have ranged from a rise of 18bp in Germany to an increase of 31bp in France. Italy’s is now above 1% again. All this means longer-term yields have been moving in Europe’s favor, which could provide further support to the euro’s appreciation. Looking ahead, recent remarks from the Italian Premier and former ECB President Mario Draghi are still affecting the markets. Mr. Draghi has said the European Union’s framework for controlling debt must be changed to help the eurozone overcome economic damage caused by the Covid-19 pandemic. Moreover, in a strategic move, he is waiving his salary as Italian prime minister as he looks to maintain the political support for his broad coalition.


The Pound struggled during the session yesterday, with the currency dropping 0.06% and extending its recent losses against the dollar. In the absence of material data, investors closely watched the speech from Bank of England (BoE) Governor Andrew Bailey. Although his remarks have not brought any news, he ratified that the economy is already recovering rapidly and the BoE is watching inflation “very carefully”. Mr. Bailey also suggested that the popularity of cryptocurrencies represents a search for yield that could be a warning sign, as people are looking for investment opportunities, but that those assets don’t have intrinsic value. Looking ahead, the impressive vaccination program in the U.K should continue to provide support and further easing of Covid-19 restriction from Monday (17) also is supportive. 


Having shown a sharp decline the day before, the Japanese yuan experienced a technical correction on Thursday, with the currency appreciating 0.2% against the dollar. However, domestic data did little to help the low-yield currency. The Economy Watchers Current Index, which gauges the current mood of businesses that directly service consumers, such as barbers, taxi drivers, and restaurant staff, fell to 39.1 in April from 49 in March – the first fall in three months. A reading below 50 indicates that more respondents reported worsening conditions than improving ones. Looking ahead, the recent extension of the state of emergency across Tokyo and some other urban areas will continue to worsen economic conditions and delay the economic re-opening. Meanwhile, the specter of less accommodative monetary policy in the U.S. inhibits any attempt at currency further appreciation. 


The Canadian dollar slid 0.26% against its U.S. counterpart on Thursday, extending its losses for the second trading session in a row. Oil prices, one of Canada’s major exports and an important market mover, were down -3.42% at $63.82 a barrel as India’s coronavirus crisis deepened and the U.S. pipeline resumed operations. Besides oil market fundamentals, the remarks from Bank of Canada Governor Tiff Macklem also highlighted Thursday’s session. He reiterated the central bank will continue to support the economy until a complete recovery, which means a healthy jobs market and achieve the bank’s inflation goal. Furthermore, Mr. Macklem said the bank is closely monitoring the CAD’s gains, to ensure further appreciation doesn’t create economic headwinds. Looking ahead, the currency is now up 4.6% so far this year, among the best performing major currency.


The Mexican Peso rose 1.19% against the dollar on Thursday, after Mexico’s Central Bank (Banxico) held its reference interest rate steady at 4.0% - a stark contrast with Brazil, where policymakers have already delivered two hikes of 0.75% since March and promised a third one of the same size in the next meeting (June). In general, the current price spike might be persistent due to economic reopening in the Mexican services sector and the global increase in commodity prices. Therefore, policymakers might have closed the door for additional accommodation. Looking ahead, in the absence of relevant data, investors will continue to digest Banxico’s decision.


China remains an interesting destination for overseas investors, with a surge in Foreign Direct Investments (FDI) between January and April. Official data showed that FDI into the Chinese mainland rose 38.6% year-over-year to 61.45 billion U.S. dollars in the first four months of this year. As a result, the Chinese Yuan edged 0.08% higher against the greenback on Thursday. Looking ahead, market participants will continue to eye the surging commodity costs and the potential impact on China’s producer prices, as it could add worries over rising global inflation. To put it simply, China’s rising prices threaten to stoke inflation around the world, adding volatility in financial markets.


Posting another day in red territory, though almost unchanged, the Brazilian Real ended down 0.03% against the dollar on Thursday. On the one hand, domestic data was soft and weighed on the BRL, with the IBC-Br economic activity index, a leading indicator of gross domestic product, falling a seasonally adjusted 1.59% in March. The reading was the first decline in 11 months due to lockdowns to curb the second wave of the Covid-19 pandemic. On the other hand, offsetting the downbeat local figures, the currency continued to benefit from the rise in commodities and interest rate increases by the central bank, which tends to contribute to the USD inflows. Looking ahead, international headlines with higher inflation in the U.S., hence expectations of higher interest rates, put additional pressure on the BRL.


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