Market Brief: Markets steady ahead of major central bank meetings

Hopes for a “soft landing” in the US economy are still intact after yesterday’s data showed unemployment claims falling and “control group” retail sales continuing to rise - suggesting that consumer demand remains remarkably strong. The dollar is holding steady, Treasury yields are moving higher. Equity futures are down as investors worry about the impact of strikes at the Big Three automakers. 

Chinese consumer spending and factory activity levels showed improvement in August, and unemployment fell, suggesting that the economy’s downturn is bottoming out. Data released by the National Bureau of Statistics last night showed retail sales rising 4.6 percent last month relative to a year earlier, up from the 2.5-percent annual gain recorded in July. Industrial production grew 4.5 percent year-over-year, accelerating from a 3.7-percent increase in the prior month, and the unemployment rate fell to 5.2 percent from 5.3 percent. Both onshore and offshore yuan pools moved higher, briefly breaking through levels last posted in late August. 

The euro remains weaker against both the dollar and yuan after yesterday’s “dovish hike” left market participants with the impression that rates have peaked - and that they may soon come down. European Central Bank president Christine Lagarde said “With today’s decision, we have made sufficient contributions, under the current assessment, to returning inflation to target in a timely manner,” but traders with longer memories suspect that policymakers have hiked into a downturn yet again. 

With oil prices pushing toward the $100 barrel level, the Canadian dollar is outperforming most of its major rivals and flirting with the 1.35 threshold against the greenback. We suspect a push higher could come early next week, with the exchange rate correcting from early September’s oversold levels - but gains should be capped as investors pivot toward expecting more rate cuts from the Bank of Canada in 2024. 

Today’s data calendar is cluttered with second-tier releases. US import prices and industrial production are seen rising 0.3 percent and 0.2 percent in August, respectively. The University of Michigan’s sentiment index will again show just how delusional US voters are, with left- and right-aligned consumers expressing diametrically-opposed views on the same economic fundamentals. And Baker Hughes will deliver its latest rig count numbers. 

Still Ahead

TUESDAY

Canadian inflation numbers for August are likely to exhibit many of the same trends as seen in their US equivalents, with rising energy prices bolstering the headline print even as the Bank of Canada’s preferred core measures hold steady. The data are unlikely to shift interest rate projections in the near term, with monetary policymakers expected to remain on hold for a prolonged period. We think markets will eventually move the number of expected rate cuts in 2024 into closer alignment with the Fed, but price dynamics are unlikely to provide the catalyst - growth will. (08:30 EDT)

WEDNESDAY

On a headline basis, British consumer price inflation likely followed its American equivalent higher in August. Frustrating aspiring doves at the Bank of England, core price growth is seen running at 6.8 percent year-over-year, down from 6.9 percent in the prior month, but still far above target and well beyond historical averages.  (02:00 EDT)

If recent history is any indication, minutes taken during the Bank of Canada’s latest policy meeting are unlikely to rock markets. Canadian central bankers tend to be more consensus-driven, and post-meeting communications have improved substantially, with Tiff Macklem’s recent Economic Progress Report providing clear insight into the decision process. (13:30 EDT)

With even the most hawkish members of the Federal Open Market Committee making the case for a September pause in the last month, odds on a rate hike are as close to zero as they’re ever likely to get. A final 2023 move should remain on the “dot plot” summary of economic projections, but recent data would suggest that next year’s core inflation expectations will come down even as growth is revised upward. If this proves incorrect, with median inflation expectations punching above the 4.7 percent mark, investors could be forced to reappraise bets on rate cuts by mid-2024. (14:00 EDT) 

THURSDAY

With wage pressures continuing to rise, the Bank of England is likely to deliver a well-telegraphed quarter-point hike, but could begin to shift forward guidance in a more dovish direction. To a significantly greater degree than its continental counterpart, the Bank is facing a stagflationary outlook, with labour market conditions worsening and the economy showing clear signs of falling into recession. We think policymakers could signal an imminent peak in rates by highlighting growing downside risks and downplaying the marginal gains to be achieved through further tightening. (07:00 EDT)

FRIDAY

The Bank of Japan is overwhelmingly expected to keep its major policy settings unchanged, but markets will focus on what Governor Ueda does to counter the yen’s weakness. In an interview last weekend, he appeared intent on jawboning the currency higher, seemingly suggesting that the central bank could lift rates out of negative territory by year end. That seems unlikely - domestic demand is weak, wage demands are running out of steam, and price pressures remain  largely limited to exchange rate-sensitive imported-goods sectors. Hawkish talk is to be expected, but hawkish action remains significantly less probable. (approximately 02:00 EDT) 

See our Economic Calendar for a more complete listing of upcoming data releases.