Weaker US Producer Prices Pressure Dollar and Boost Market Expectations
The dollar index (DXY00) decreased by -0.14% on Thursday. Pressure on the dollar stemmed from lower-than-expected US April producer prices, which in turn reduced T-note yields and enhanced speculation that the Federal Reserve might lower interest rates. Meanwhile, other US economic reports presented a mixed picture for the dollar.
Key Economic Indicators
Weekly initial unemployment claims remained steady at 229,000, aligning closely with expectations of 228,000. The April final-demand PPI reported a decrease of -0.5% month-on-month and a +2.4% year-on-year change, falling short of forecasts that anticipated +0.2% m/m and +2.5% y/y.
In retail, April sales increased by +0.1% m/m, surpassing expectations for no change. However, excluding autos, retail sales also saw a +0.1% m/m rise, which was below the projected +0.3% m/m increase.
The May Empire manufacturing survey revealed a decline in the general business conditions index by -1.1 to -9.2, contrary to expectations for a rise to -8.0. Yet, the May Philadelphia Fed business outlook survey indicated a positive sign, with the general conditions index gaining +22.4 to -4.0, better than the expected -11.0.
The manufacturing production for April fell by -0.4% m/m, which was more significant than the anticipated -0.3% m/m and marked the largest drop in six months. The May NAHB housing market index similarly dipped by -6 to a 1.5-year low of 34, diverging from expectations of no change at 40.
Federal Reserve Policies
Fed Chair Jerome Powell indicated that policymakers are contemplating alterations to the framework guiding monetary policy decisions. This includes reassessing the approach to employment shortfalls and inflation targets. According to Powell, “Anchored inflation expectations are critical to everything we do, and we remain fully committed to the 2% target today.” The market is currently pricing in an 8% chance of a -25 basis point rate cut following the upcoming FOMC meeting on June 17-18.
Currency Market Reactions
EUR/USD (^EURUSD) saw a marginal increase of +0.04% on Thursday. This rise was primarily attributed to the dollar’s weakness. The Eurozone’s March industrial production exceeded expectations, showing a +2.6% m/m increase, the highest in over four years, which served as a bullish factor for the euro. However, gains were capped as Eurozone Q1 GDP was revised down to +0.3% q/q from +0.4%.
Comments from ECB Vice President Luis de Guindos tempered enthusiasm as he highlighted potential headwinds for Eurozone companies, including trade tensions and high funding costs. Swaps indicated a 91% likelihood of a -25 basis point cut by the ECB at its June 5 policy meeting.
Japanese Yen Performance
USD/JPY (^USDJPY) fell by -0.78% on Thursday. The yen appreciated against the dollar following the softer-than-expected US April PPI report, which also bolstered expectations for Fed rate cuts. Additionally, Japan’s April machine tool orders rose for the seventh consecutive month, contributing to the yen’s strength. Higher Japanese government bond yields supported the yen as the 10-year JGB yield climbed to a six-week high of 1.491%.
Precious Metals Outlook
June gold (GCM25) closed up +38.30 (+1.20%), while July silver (SIN25) gained +0.236 (+0.73%). Precious metals rebounded from early losses, with gold recovering from a five-week low and silver climbing from a one-month low. This recovery was spurred by the dollar’s weakness and lower T-note yields, alongside persistent geopolitical risks in the Middle East.
Ongoing fund liquidation of long gold positions has been a burden due to easing US-China trade tensions, following a weekend agreement to reduce tariffs. Meanwhile, gains in silver were limited due to concerns about industrial metal demand following the significant decline in US April manufacturing production and the Eurozone’s downward GDP revision.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are solely for informational purposes. For more information, please view the Barchart Disclosure Policy.
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