Producer Inflation is here, Canadian dollar rallies on robust jobs report and oil drops

This week the Fed was mostly united in signaling they have the tools to fight inflation and that upcoming round of pricing pressures will likely be transitory and that they will have to wait until next year to be proven wrong.  

Wall Street will be proactive in forecasting whether price pressures are not transitory.  If the next few months show that the trend is for consistent upside surprises, the bond market selloff could accelerate, sending Treasury yields and the dollar higher.  Fed policy might be on cruise control until inflation is at 2% for at least a year and when the labor market returns to full employment, but if Treasury yields surge too quickly, that will force Fed action.  It might take a couple of months, but the Fed could be forced to alter their purchases, increasing the weighing to more Treasuries and less mortgage-backed securities.  

PPI

A delayed PPI reading brought some suspense to the last trading day of the week.  US producer prices showed inflationary pressures are here.  The March PPI for final demand came in twice as hot as expected at 1.0% in March.  The annual reading rose 4.2%, which was the largest increase since 2011.  At the wholesale level, bottlenecks, trade issues, and the early stages of a commodity super cycle are forcing pricing pressures.  These costs may take time but will be passed onto the consumer.  

US stocks are struggling for direction as investors are unsure if the unwind from growth is over and if the cyclical rotation has hit a wall.  The S&P 500 index is making a push for a new record high, while the Russell 2000 index is weakening alongside the Nasdaq.  

FX

The Canadian dollar got its groove back after the economy added 303,100 new jobs in March.  Canada’s fight against COVID is not going as well as their southern neighbors but this employment report shows the resilience of the economy.  Canada is still facing a very serious third COVID wave, so restrictive measures won't be going away anytime soon.  

The unemployment rate improved from 8.2% to 7.5% alongside the participation rate half a percentage point increase to 65.2%.  The pullback in oil prices, Canada’s largest export, appears to be nearing its end and that should be another catalyst for further loonie strength.  

Oil

Crude prices traded initially lower as a strong dollar returns and as big oil readies investments for new exploration.  French giant, Total is expected to unveil a $5 billion investment that will build a pipeline, export terminal to Tanzania.  The oil majors have had a couple solid quarters and are ready to resume capital expenditures.  The global economic recovery will see improved demand for crude in the summer months and supply shortage risks could emerge due to lack of investment during COVID-19.  

The crude demand outlook for Europe and emerging markets is still messy and until optimism returns, oil prices could remain heavy.  

Oil prices rallied shortly after the NY open mostly on technical buying.  Expectations are growing that that the EU is turning a corner in the fight against COVID and that sunnier days will be here next month.  The EU is diversifying their vaccine supplies away from AstraZeneca and is expected to secure around 1.8 billion mRNA COVID vaccines that will solidify their supplies for 2022 and 2023.  Earlier Germany announced the doubling of vaccinations and it seems that Europe is now aggressively whatever it takes to secure a better future.  The J&J single-shot vaccine is also being reviewed by the regulator.  

Oil is in for a choppy trade environment over the next couple of weeks.  

Gold

Gold prices are falling as the dollar mounts a comeback and as US stocks continue to hover near record highs.  It seems that gold will continue to follow the bond market, which saw weakness after some hotter-than-expected PPI readings.  The Fed for most of the week has kept the bond market in check but that will get tested if US inflation heats up.  

The Fed can’t get anymore dovish, so gold investors will have to wait and see how the inflation story unfolds over the next few months.  Gold will have its day in the sun, it just needs the dollar to weaken and for Treasury yields to have a steady rise higher.  

A bottom is firmly in place for gold so buyers should emerge on every major dip.  

Bitcoin

Bitcoin is higher despite a strong dollar and could be entering a healthy consolidation.  The inflation debate might trigger some flows for Bitcoin but nothing that will be the primary catalyst if prices resume the march into uncharted territory.  

Next week will be a busy week for the cryptocurrency world as Coinbase, the largest US crypto exchange goes public and as many central bankers speak on digital currencies.  A disappointing IPO or excessive concerns over enhanced regulatory oversight could weigh on Bitcoin and the other altcoins. 

A wave of central bankers will talk about the future of digital currencies: ECB Board member Fabio Panetta speaks on digital currency and will likely reiterate the differences between cryptocurrencies and how the digital euro.  The Swiss National Bank Governing Board Member Maechler will speak on markets and digital transformation to money market managers.  She may discuss how testing will evolve using CBDC going forward following the success with wholesale transactions.  Euro-area finance ministers will meet virtually and review insolvency frameworks and the digital euro.  If digital euro is closer to launching next year, that could be a negative driver for Bitcoin and cryptocurrency mainstream acceptance.

Bitcoin needs another major Wall Street giant to embrace cryptocurrencies for prices to rally beyond the $60,000 level.