Canadian dollar rallies on robust jobs report, US Producer Inflation is here

This week the Fed was mostly united in signaling they have the tools to fight inflation and that upcoming round of pricing pressures will likely be transitory and that they will have to wait until next year to be proven wrong. 

Wall Street will be proactive in forecasting whether price pressures are not transitory.  If the next few months show that the trend is for consistent upside surprises, the bond market selloff could accelerate, sending Treasury yields and the dollar higher.  Fed policy might be on cruise control until inflation is at 2% for at least a year and when the labor market returns to full employment, but if Treasury yields surge too quickly, that will force Fed action.  It might take a couple of months, but the Fed could be forced to alter their purchases, increasing the weighing to more Treasuries and less mortgage-backed securities.  

PPI

A delayed PPI reading brought some suspense to the last trading day of the week.  US producer prices showed inflationary pressures are here.  The March PPI for final demand came in twice as hot as expected at 1.0% in March.  The annual reading rose 4.2%, which was the largest increase since 2011.  At the wholesale level, bottlenecks, trade issues, and the early stages of a commodity super cycle are forcing pricing pressures.  These costs may take time but will be passed onto the consumer. 

US stocks are struggling for direction as investors are unsure if the unwind from growth is over and if the cyclical rotation has hit a wall.  The S&P 500 index is making a push for a new record high, while the Russell 2000 index is weakening alongside the Nasdaq. 

FX

The Canadian dollar got its groove back after the economy added 303,100 new jobs in March.  Canada’s fight against COVID is not going as well as their southern neighbors but this employment report shows the resilience of the economy. Canada is still facing a very serious third COVID wave, so restrictive measures won’t be going away anytime soon.

The unemployment rate improved from 8.2% to 7.5% alongside the participation rate half a percentage point increase to 65.2%.  The pullback in oil prices, Canada’s largest export, appears to be nearing its end and that should be another catalyst for further loonie strength. 

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