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Weak US Inflation, Astonishing Canadian Jobs Growth Keep Central Banks on Hold

Karl Schamotta May 10, 2019

US consumer prices rose less than expected last month – suggesting that “transitory” factors highlighted by the Federal Reserve aren’t passing through the data just yet.

The Bureau of Labor Statistics released numbers this morning that show the Consumer Price Index rising 0.3 percent in April, up 2.0 percent relative to last year.

Excluding highly-volatile food and energy categories, inflation rose 0.1 percent, up 2.1 percent on an annualized basis. Consensus estimates had set the increase in core inflation slightly higher, following a 2 percent gain in March that also missed projections.

The three-month annualized change in core prices was 1.6 percent – the lowest in almost two years.

If continued, these numbers may shake Jerome Powell’s confidence in the likelihood of an inflationary rebound – and are likely to weigh on the near-term outlook for US interest rates. The dollar is falling as front-end Treasuries drop and interest rate differentials narrow against it.

North of the border, Canada created 107,000 thousand jobs last month, smashing market expectations and statistical records simultaneously. Wage growth accelerated to 2.6 percent on an annualized basis, and the unemployment rate dropped to 5.7 percent – beating consensus forecasts for a 15,000-position gain, with the unemployment rate holding near 5.8 percent.

On a year-over-year basis, employment grew by 426,000, and total hours worked were up 1.3 percent – suggesting that Bank of Canada Governor Poloz was correct in suggesting that broad-based economic weakness wasn’t evident in the data. The Canadian dollar is up almost a full percentage point as we go to pixels, with odds on an interest rate cut falling precipitously.

Broader financial markets remain volatile after the Trump administration formally increased tariffs on $200 billion in Chinese goods to 25 percent and threatened to impose levies on another $325 billion in goods that aren’t currently taxed.

The new taxes represent a double-edged sword for the dollar, likely to begin raising inflation levels within the next three months, while weighing on overall economic growth.

Bottom Line: Moribund inflation in the United States and surging employment in Canada are likely to keep both central banks firmly in neutral – potentially providing fuel for financial markets to “climb the wall of worry” that has been constructed around the trade war narrative. For now, it may be prudent to worry more about a “melt-up” than a meltdown…

Karl Schamotta
Chief Market Strategist

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