Week in FX Americas – Inflation Concerns Come to the Fore

• US consumer sentiment declines
• Consumer has a balanced view on inflation
• Canucks take price rise on stride

Despite the geopolitical event risk in play, a couple of North American economic releases on Friday gauged consumer sentiment and inflation concerns.

In the U.S, the preliminary University of Michigan Consumer Sentiment Index for July declined to 81.3 from a final June reading of 82.5. This month's early reading was well below the 83 prints expected. The report would suggest that U.S. consumers seem to be more cautious about their own economy's future. Many analysts had expected the American consumer to ramp up personal spending in the second quarter; especially since so many people stayed home during the particularly harsh winter.

It's worth noting that a more downbeat outlook does not necessarily equate to consumers pulling back from spending. The report could be a warning sign that higher gas prices (supply issues), coupled with overseas geopolitical events are beginning to dull household enthusiasms. The knock-on effect will potentially hurt the retailer's bottom line.

The U.S. consumer does expect a small pick-up in inflation over the coming year, but they appear to have a much more balanced view of long-run inflation (watched by the Federal Reserve). Their one-year expectations edged up to +3.3% from +3.1% at the end of June, but their longer-term view (five to 10 years) fell to +2.6% from +2.9%.

Canucks Take Rising Prices in Stride

In Canada, consumer prices rose more than expected in June (+0.1%), and the second quarter’s average consumer-price index (CPI) of +2.2% was above the Bank of Canada’s (BoC) boosted +2.1% forecast from midweek. Governor Stephen Poloz had forecast total CPI to average +2% in the third quarter and the core measure to average +1.7%. The surprise jump is not expected to influence the BoC due to the fact that food costs were again a strong contributor. It's a potential transitory factor that the BoC has suggested is unlikely to persist.

The loonie, as Canada’s one-dollar coin is known, likes the stronger-than-expected print, and it extended its earlier gains against the greenback ($1.0740) but it seems to have been a sour challenge to the Canadian bond market. In theory, the CPI increase should not be too supportive for the CAD since the BoC made it clear this past week that it considers the recent uptick transitory. The USD remains a better bid on CAD rallies.

In the bond market, CAD 10's backed up to +2.15% from +2.137%. Depending on which way the wind blows in Ukraine and the Gaza Strip, investors may find the Canadian product an attractive option should the madness continue. That, in turn, could push Canuck bond yields lower over time. When risk aversion dominates, fundamentals fall behind in importance.

What to Expect Next Week

North America gets to see the bulk of economic releases next week. The U.S. have a peek at prices and new home sales at the start of the week and ends with claims and Friday's durable goods orders. Canada is less busy and contends with retail sales mid-week.