Strong Labor, Inflation Data Boosts U.S. Dollar Demand

Stronger-than-expected U.S. economic data set the tone in the markets on Thursday leading to rise in Treasury yields and a firmer U.S. Dollar. Stocks, however, remained rangebound ahead of the start of earnings season on Friday. Commodity prices took a hit with the stronger U.S. Dollar weighing on foreign demand for dollar-denominated gold and crude oil.

Setting the pace in the markets on Thursday were strong U.S. labor and inflation data, which dampened concerns about the world’s largest economy. The news helped alleviate the pressure on the U.S. Dollar, which was poised for a loss against a basket of currencies in the wake of a drop in yields due to worries over last Friday’s mixed March U.S. non-farm payrolls report.

The greenback was also being pressured by this week’s mixed report on domestic consumer prices which reinforced the notion that underlying U.S. inflation remains subdued. Furthermore, the minutes from the Federal Reserve’s March monetary policy meeting reinforced the thought that the central bank feels the economy is not yet strong enough to support another rate hike.

Conditions changed abruptly on Thursday, however, with the release of the U.S. Weekly Jobless Claims and Producer Price Index reports. The strong numbers forced dollar bears to quickly cover short positions.

Weekly Jobless Claims

On Thursday, the government reported that the number of Americans filing applications for unemployment benefits dropped to a 49-1/2 year low the week-ending April 5. The news signaled sustained labor market strength that could dim expectations of a downturn in economic growth.

The U.S. Labor Department said initial claims for state unemployment benefits fell 8,000 to a seasonally adjusted 196,000 for the week-ended April 6, the lowest level since early October 1969. Economists were looking for an increase to 211,000 in the latest week.

The report represented the fourth straight week of declines. Furthermore, data for the prior week was revised higher by 2,000.

Additionally, the four-week moving average of initial claims, considered a better measure of labor market trends as it levels out week-to-week volatility, fell 7,000 to 207,000 last week, the lowest level since early December 1969.

U.S. Producer Price Index

The U.S. Labor Department said on Thursday that U.S. producer prices increased by the most in five months in March, but underlying wholesale inflation remained subdued.

The Producer Price Index for final demand rose 0.6 percent last month, lifted by a surge in the cost of gasoline. That was the largest increase since October 2018 and followed a 0.1 percent gain in February.

In the 12 months through March, the PPI rose 2.2 percent after advancing 1.9 percent in February. Economists estimated the PPI would climb 0.3 percent in March and increase 1.9 percent on a year-on-year basis.

The Core PPI increased 2.0 percent in the 12 months through March. That was the smallest annual increase since August 2017 and followed a 2.3 percent rise in February.

Conclusion

This week’s U.S. consumer and producer inflation data confirmed that inflation was soft. This confirmed comments in the minutes of the Federal Reserve’s March 19-20 policy meeting published on Wednesday. In the minutes, policymakers described inflation as “muted,” though officials expected it to rise to or near the U.S. central bank’s 2-percent target.

Nonetheless, with the short-term inflation trend rising U.S. Dollar investors felt the data was strong enough to encourage profit-taking and short-covering after a recent short-term decline. Furthermore, the solid jobless claims data also supported the Fed’s positive outlook for U.S. labor conditions.