Robust US Inflation Could Lift the Greenback

Inflation is beginning to percolate, which will be carefully evaluated by the Fed, as the central bank has already tipped their hand that a move in June would be warranted. Fed funds are pricing in approximately a 70% chance that the Fed will move, and with solid jobs data and rising producer prices, who could blame them. While inflation is growing in the UK, EU inflation remains subdued, which has allowed the ECB to keep their dovish bias.

Producer Prices Were Stronger than Expected 

On Thursday in the U.S. the Department of Labor released their wholesale price report. The BLS reported that U.S. April PPI rose 0.5% with the ex-food and energy component up 0.4%. This inflation figure was larger than expected and there were no revisions to March's 0.1% headline or core figures. On an annual basis, PPI climbed to a 2.5% year over year pace from 2.3% year over year. The core rate accelerated to 1.9% year over year from 1.6% year over year. The subcomponents showed that food prices rose 0.5% after a 0.3% February gain, with food costs up 0.9% and energy up 0.8%. Services costs rose 0.4% versus the prior 0.4% gain.

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While wholesale prices can be transitory, what could really drive inflation is wage gains. There is tightness in the labor market, and claims data remains at depressed levels. Jobless claims dropped 2K in the first week of May extending the 19k plunge to 238k in the prior week from the 257k Easter reading and 243k figure in the BLS survey week. Claims are printing just above the 44-year low of 227k in the President's Day week. Claims are entering May below prior averages of a lean 243k in April, 251k in March, 241k in February. Tight claims mean there is little slack in the labor market for corporations to call on. Job opening continue to climb according to the latest challenger report, which should eventually push up wages which can lead to a rise in consumer driven retail prices.

Canadian Housing Prices Continue to Rise

Inflation outside the United States is also climbing. Canada's new housing price index grew 0.2% in March after the 0.4% month over month gain in February. The improvement in March was driven by appreciation in Vancouver and Toronto. The new home price index grew at a 3.3% year over year rate in March, matching the growth pace in February that was the fastest since June of 2008's 3.6% pace.

In the UK, inflation is stable. The central bank released its quarterly Inflation Report, with forecasts little changed from the previous report in February. Its 2017 growth forecast was trimmed to 1.9% from 2.0%, though the central bank's projections for 2018 and 2019 were both upwardly nudged by 0.1 of a percentage point. Still 2% is the upper end of the bank that the BoE is willing to accept. This followed their decision to keep rate and QE unchanged. The BoE noted that recent sterling gains would lower import prices and dampen upward pressure on inflation, which in turn should ease the inflation-adjusted squeeze on household incomes.
On the continent, the European Commission lifted EMU growth projection to 1.7% from 1.6% previously. Growth is expected to accelerate to 1.8% in 2018. At the same time inflation is expected to pick up to 1.6% this year from just 0.2% in 2016, but the Commission expect it to fall back to 1.3% next year, which would be far below the 2% upper limit for price stability again.

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A rise in inflation in the U.S., that comesat a faster rate than Europe, Canada and Asia, will lift U.S. yields relative to its trading partners across the spectrum. This will help buoy the dollar and could lead to trending forex markets.

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