Over the past 12 hours, we have seen very little consistency
in the performance of the U.S. dollar which is unchanged against
the EUR, JPY and CHF, higher against the GBP and AUD and lower
against the CAD and NZD. Although stock futures are pointing to a
lower open, currencies are struggling to hold onto their gains
against the dollar following much weaker than expected Chinese
data.
For any skeptics questioning the validity of the Federal
Reserve's dovishness, the latest inflation report provides solid
evidence for why easy monetary policy is still needed. Not only
has job growth in the U.S. slowed but producer prices fell 0.2
percent in the month of April. Excluding food and energy costs,
PPI increased but still at a slower pace than the previous month.
Core prices may be more important to central bankers, but the
trend of headline inflation cannot be ignored. With the U.S.
dollar strengthening and commodity prices ticking lower over the
past month, there is a reasonable chance that lower PPI could
translate into lower CPI. The preliminary University of Michigan
consumer sentiment report for the month of May is due later this
morning and we expect confidence to retreat given the recent
pullback in equities.
Up North, 58k jobs were created in Canada, more than 5 times
expectations. Although the unemployment rate increased from 7.2
to 7.3 percent, the strength of the labor market is a stark
contrast to the weakness of the job growth in the U.S. Between
March and April, a total of 140k jobs were added, which would be
the equivalent of 1.4 million in non-farm payrolls. We haven't
seen it in the numbers yet but the improvement in job growth will
undoubtedly translate into stronger consumer spending. When the
Bank of Canada last met, they were surprising hawkish but there
has been very little data to support their views. Now we see that
improvements in the labor market is behind their optimism.
Meanwhile the euro continued to stabilize against the U.S.
dollar but investors should not mistaken the lack of further
weakness for renewed optimism. The Greeks are still having a
tough forming a coalition government and the only reason why the
euro has not extended its losses is because of reports by the
Financial Times that the EU could give Spain more time to meet
their budget targets. The Eurozone's fourth largest economy also
released new reforms this morning that involved requiring banks
to raise provisions from 7 to 30 percent, providing an additional
buffer of about 30 billion euros. They will also inject capital
into insolvent banks and conduct independent valuation of real
estate assets. Using tax payer money to recapitalize insolvent
banks is always a controversial issue but in the case of Spain,
could be desperately needed. Throughout the course of the day,
traders should continue to watch developments in Spain and Greece
and look for any new signs cooperation between the leading
parties.