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.