Market Wire - US Price Pressures Increase, Pushing Yields and the Dollar Upward

Karl Schamotta, Chief Market Strategist: karl.schamotta@corpay.com

Price pressures are rising more quickly than expected in the United States, supporting the case for jumbo-sized hikes at coming Federal Reserve meetings. The Bureau of Labor Statistics' employment cost index climbed 1.4 percent on a non-seasonally adjusted, annualized basis in the first quarter, up 4.5 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, decelerating to 5.2 percent in March relative to the prior year - down from the 5.4 percent gain recorded in February. Personal income rose 0.5 percent month over month. And household spending rose 1.1 percent as consumers kept their pocketbooks in the open and locked position - despite rising prices, political polarization, and the war in Ukraine. 

Treasury yields and the dollar moved slightly higher on the print, with market pricing suggesting that investors expect Jerome Powell and his colleagues to raise rates by two full percentage points over the next four meetings. 

The euro remains modestly stronger after first quarter gross domestic product and inflation prints provided more evidence of stagflationary dynamics in the common currency area - something that could force the European Central Bank to begin tightening policy in July. The bloc’s economy grew just 0.2 percent in the first three months of the year, while core inflation hit 3.5 percent year-over-year in April, with headline prices soaring 7.5 percent. 

North of the 49th parallel, the Canadian economy grew 1.1 percent in February, beating expectations for a 0.8 percent expansion. Data from Statistics Canada showed broad-based gains in construction, food and accommodation, manufacturing, and resource extraction as the country emerged from lockdowns and responded to rising global demand. 

A preliminary estimate for March suggested the economy could expand another 0.5 percent, adding further momentum to the Bank of Canada’s monetary tightening drive. The loonie strengthened modestly on the report as odds on a 50-basis point move at the June meeting neared the 100 percent mark.