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Falling Jobless Claims and Rising Producer Prices Keep Currency Markets on the Defensive

by Karl Schamotta | May 13, 2021

What happened: A better-than-expected 473,000 Americans submitted paperwork for state unemployment benefits last week – suggesting that businesses continue to scale up hiring efforts as the economy recovers. Economists had forecast a number closer to 490,000.

3.655 million people continued to collect payments in the week ending May 1.

Vaccinations, government handouts, and easing social distancing restrictions have helped lift consumer spending well above pre-pandemic levels, but the employment market remains deeply scarred. More than eight million jobs have been lost, and the number of people collecting benefits through one of several programs, including regular state aid and federal emergency programs, remains almost eight times higher than in 2019.

Inflation pressures continue to grow: A separate release showed production costs rising more quickly than expected. The Bureau of Labor Statistics reported that its producer price index for final demand jumped 0.6% from the prior month after a 1% gain in March, beating forecasts for a 0.3% increase. Excluding highly-volatile food and energy categories, core producer prices rose 0.7% – well above the expected 0.4%.

In the background: Markets are struggling to reconcile conflicting signals after last week’s disappointing unemployment report and yesterday’s superheated inflation numbers. Worker shortages, shifting consumer preferences, soaring commodity prices, and bottlenecks in the supply of critical components are all intersecting to inject uncertainty into the stream of data releases  – and although mainstream economists and Federal Reserve policymakers expect these effects to fade as conditions normalize, many market participants are taking out insurance anyway.

Caution prevails: US 10-year Treasury yields are holding steady near the 1.685% mark, and the trade-weighted dollar remains roughly 0.5% higher relative to levels from early yesterday morning. Technology sector shares are up, while emerging market and commodity-linked currencies are in negative territory as traders adopt defensive positioning.

Keep an eye out: Last night, Premier Li Keqiang – a trained economist and the second most powerful man in China’s Communist Party structure – reportedly told state broadcaster National Radio that policymakers would strengthen controls on the raw materials market to help limit costs for companies that have been pressured by a surge in commodity prices. If China successfully tamps down speculative activity, the global narrative might shift, and base metals prices could tumble – a development that would negatively impact the Canadian dollar.
Karl Schamotta
Chief Market Strategist

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