Dollar Climbs as Inflation Fears Push Bond Yields Higher

The dollar index (DXY00) climbed to a 1.5-week high today and is up by +0.22%.  The dollar is moving higher today on the stronger-than-expected US Apr PPI report, which was hawkish for Fed policy.  The dollar also has safe-haven support on concerns that the US-Iran ceasefire may break down after President Trump said the current ceasefire was on "life support." In addition, today's jump in the 10-year T-note yield to a 10-month high of 4.49% strengthens the dollar's interest rate differentials. 

US Apr PPI final demand rose +1.4% m/m and +6.0% y/y, stronger than expectations of +0.5% m/m and +4.8% y/y, with the +6.0% y/y jump being the largest increase in 3.25 years.  Also, Apr PPI ex-food and energy rose +0.6% m/m and +5.2% y/y, stronger than expectations of +0.3% m/m and +4.3% y/y, with the +5.2% y/y gain being the largest increase in 3.25 years.

Swaps markets are discounting the odds at 2% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) today is down by -0.25%.  Today's stronger dollar is weighing on the euro. The euro is also under pressure from today's Eurozone economic reports, which were dovish for ECB policy.  In addition, today's +1% rally in crude oil prices to a 1-week high is negative for the Eurozone economy and the euro as Europe imports most of its energy.

Eurozone Mar industrial production rose +0.2% m/m, slightly weaker than expectations of +0.3% m/m.

The French Q1 mainland unemployment rate rose +0.2 points to a 5-year high of 7.9%, showing a weaker labor market than expectations of 7.8%.

ECB Governing Council member Olli Rehn warned that recent data are starting to point to stagflation as a result of the Iran war and rising energy prices, saying, "The first signs were already visible in the statistics, when growth in the Eurozone in the first quarter was only slightly positive, and inflation accelerated to 3%."

Swaps are discounting an 82% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) today is up by +0.13%.  The yen is under pressure today from a stronger dollar. Also, the April Eco Watchers Outlook Survey rose less than expected, a negative factor for the yen.  In addition, today's rally in crude oil prices to a 1-week high is bearish for the Japanese economy and the yen, as Japan imports 90% of its energy needs.  Higher Japanese government bond yields are supportive for the yen after the 10-year JGB bond yield rose to a 29-year high of 2.60% today.

The Japan Apr Eco Watchers Outlook survey rose +0.7 to 39.4, weaker than the 40.9 expected.

The markets are discounting a +72% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) today is down -4.00 (-0.09%), and July COMEX silver (SIN26) is up +2.2499 (+2.63%).

Gold and silver prices are mixed today, with silver up sharply at a 2-month high.  Today's stronger dollar is weighing on gold prices. Also, today's stronger-than-expected US Apr PPI report may prompt the Fed to tighten monetary policy, a bearish factor for precious metals.  In addition, higher global bond yields today are bearish for precious metals. Finally, today's rally in crude oil prices to a 1-week high raises inflation expectations and may prompt the world's central banks to tighten their monetary policies, a negative factor for gold. 

Precious metals have safe-haven support after the US and Iran failed to come to an agreement to end the war, which could lead to renewed hostilities in the Middle East.  Silver prices also have carryover support from today's rally in copper, which pushed it to a new record high.  Copper prices are soaring as a squeeze on Middle Eastern sulfur supplies, driven by the closure of the Strait of Hormuz, threatens the production outlook for some global copper mines, as sulfur is used in processing about a sixth of global copper. 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 5-month low on March 31 after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 9-month low last Tuesday after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following last Thursday's news that bullion held in China's PBOC reserves rose by +260,000 ounces to 74.64 million troy ounces in April, the largest monthly increase in a year and the eighteenth consecutive month the PBOC has boosted its gold reserves.