Softer Yields = Softer Dollar


It will be difficult for the April retail sales to match the March gain of 9.7%. We know that auto sales were among the strongest in history last month (18.51 mln unit seasonally adjusted annual pace). However, anecdotal reports suggest fleets were particularly active and maybe driving up used car prices too (where a 10% jump in April accounted for a third of the increase in headline CPI). The economists surveyed by Bloomberg seem particularly bearish on the core retail sales, which exclude food services, autos, gas stations, and building materials. The median forecast is for a 0.4% decline, and the average estimate is -0.17%. However, of the 23 economists, 11 look for an up number. April industrial output is widely expected to have expanded further after the 1.4% increase in March. Two of the 62 economists surveyed look for a decline. The median and average forecasts are near 1%.

Three data points today will feed the investors' anxiety about inflation. First, April import/export prices are expected to rise by 0.6% and 0.8%, respectively. Due to the base effect, these gains, notable in their own right, will appear as a year-over-year surge of 10.2% and 14.0% for import and export prices, respectively. This hints at positive terms of trade developments working in the US favor even if masked by a record trade deficit. Second, the utilization rate of US industrial capacity says something about the slack in the economy. The capacity utilization rate peaked since last year's trough in January at 75.3%. The poor weather in February saw the utilization rate fall to a little below 73.4%. It bounced back in March and is expected to have moved to 75% in April. In 2019, with inflation still too low for the Fed's comfort, it was chopping around 76%-78%. Third, the University of Michigan consumer survey also asks about long-term (5-10 years) consumer inflation expectations. It stood at the end of 2019 at 2.2% (which admittedly was a bit of an outlier and averaged 2.4% in the last few months of the year). At the end of last year, it was at 2.5%. This year it has been 2.7%-2.8%, which is the highest since 2014.

Over the past month and year-to-date, the Canadian dollar is the strongest of the major currencies (3.1% and 4.8%, respectively), driven arguably by the tapering Bank of Canada's bond purchases and the dramatic rise in commodity prices. However, yesterday, it posted its first back-to-back decline in a month. Yesterday's pullback was blamed by some on the pullback in commodity prices, but note that the Bank of Canada Governor Macklem's comments also may have spurred some profit-taking. He said he wanted to ensure that the appreciation of the Canadian dollar did not disrupt its exports. Last week, Canada did report a C$1.14 bln trade deficit in March after a C$1.4 bln surplus in February. However, the source of the deterioration was not so much a function of exports, which edged up 0.3%, but the surge in imports (5.5%). Indeed, in Q1 21, exports rose by 8.3% to C$153 bln, their highest value since Q2 19. However, Macklem did play down an early rate hike, saying he wanted to see the number of employed surpass the pre-pandemic level by 200k to indicate a full recovery.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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