US Treasury yields slip as inflation data match estimates

Posted May 01, 2018

Inflation is finally moving closer to the Fed's targeted 2%, with consumer prices accelerating in the year through March, although this is not expected to change the Fed's plan to gradually increase interest rates.

Consumer prices as measured by the personal consumption expenditures (PCE) price index jumped 2.0 percent year-on-year last month. The Fed has projected inflation to be around 1.9 percent by the end of 2018.

The dollar, traded against a basket of major currencies, rose 0.4 percent to 92.221.DXY, the highest since January 11 and higher than where it started the year. That was the biggest gain since February 2017 and followed a 1.7 percent rise in February, the Commerce Department said on Monday. This measure had been consistently moving on up, moving on up since it bottomed at 1.3% in August previous year.

"Fed speakers have done little to push back against this expectation. we expect no fireworks", JPMorgan economist Michael Feroli said in a note to clients.

The Fed is aiming to raise interest rates quick enough to prevent inflation from spiking, but slow enough to allow the economy to grow at a stable level.

Inflation was weak for much of 2017, a puzzle for many economists who expected a low unemployment rate would translate into stronger growth in wages and prices.

The Fed meets again this week, on Tuesday and Wednesday.

Relatively solid Canadian inflation data has also kept Canadian Dollar investors optimistic.

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The greenback climbed to a 2-1/2-month high of 109.540 yen on Friday as long-term USA yields rose.

The markets are also focused on Friday's April U.S. non-farm payrolls report, which could provide further signs of strength in the world's biggest economy.

The thing is the latest core PCE inflation reading is in line with expectations, both of the market and that of the Fed's.

Analysts are expecting strong US growth throughout 2018, spurred by increasing federal spending and a rush of economic activity spurred by the 2017 tax cuts. The quarterly report includes the March figures on spending and inflation.

Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a 1.1 percent annualized rate in the January-March period, the slowest in almost five years, after surging at a 4.0 percent pace in the fourth quarter.

The RBA said keeping monetary policy steady was consistent with its growth and inflation targets, adding that inflation was likely to remain for some time.

The euro was almost flat at $1.2075 after slipping 0.4 percent overnight and approaching $1.2055, the 3-1/2-month low set on Friday.