Market Wire: Strong North American Data Supports Central Bank Hawkishness

Price pressures are rising more quickly than expected in the United States, cutting odds on a pause in monetary tightening at coming Federal Reserve meetings. 

Data released this morning by the Bureau of Labor Statistics showed the employment cost index climbing 1.3 percent on a non-seasonally adjusted, annualized basis in the second quarter, up 5.1 percent over a year earlier. Policymakers consider the index, a quarterly measure of wages and benefits paid by employers, a particularly accurate measure of underlying wage inflation because it is less affected by shifts in the composition of employment between high-wage and low-wage industries or between high- and low-wage occupations within industries - issues that have plagued other earnings data in the post-pandemic period. 

Separate data from the Bureau of Economic Analysis showed the Fed’s preferred measure of inflation, the core personal consumption expenditures price index, remaining elevated at 0.6 percent in June on a month-over-month basis, above the expected 0.5 percent, and up 4.8 percent year-over-year. Personal income rose 0.6 percent month-over-month, falling in inflation-adjusted terms. 

Inflation-adjusted household spending rose just 0.1 percent, down from a revised 0.3 percent increase in May. Data released yesterday showed consumers spending less on goods and more on services in the second quarter, and a slew of evidence points to high prices forcing a shift in buying patterns. 

Treasury yields and the dollar moved slightly higher as the numbers hit the wires, bolstering odds on tighter Fed policy in the months ahead.

Data released at the same time on the naturally air-conditioned side of the border showed the Canadian economy flatlining in May - better than the expected -0.2 percent contraction - and a preliminary estimate suggested output could grow 0.1 percent in June. The numbers from Statistics Canada showed the services sectors growing 0.4 percent and goods-producing industries shrinking -1.0 percent on a month-over-month basis in May, as consumers switched spending patterns, auto parts manufacturers experienced shutdowns, and the energy industry suffered a modest reversal. 

For policymakers at the Bank of Canada, the combined data should help support the case for a 50 basis point hike at the September meeting - but with consumer sentiment levels worsening, household debt service costs rising, and the global economy slowing, rate increases should slow from there. 

The loonie weakened modestly as currency traders responded to the US and Canadian data simultaneously. The Canadian dollar is essentially flat against the greenback on a month-to-date basis, remaining tightly rangebound as contravening forces - prospectively higher energy investment and tightening financial conditions - limit directional movement.