Market Brief: Momentum trades fade as nerves jangle across markets

With the US government shutdown dragging into a 22nd day, statistical agencies and the Federal Reserve under communications blackouts, and the precious metals complex melting down, the dollar is trading sideways against a basket of its peers this morning.

Punters in prediction markets are betting that the government will remain closed until mid November, and the political tea leaves aren’t looking promising. In contrast with prior episodes, polls are showing that voters think both Republicans and Democrats share the blame for failing to find a funding solution, and the president’s approval ratings are holding firm, suggesting that the forces that previously forced politicians to the bargaining table aren’t yet in place.

Selling pressure in the gold markets appears to be easing after yesterday’s historic tumble, but the lack of a clear catalyst for the move has left traders jittery and looking for safety in the fiat currency space. We’re not sure what caused gold’s run higher this year—the ‘dollar debasement’, central bank reserve accumulation, and Chinese buying narratives all have obvious holes—and therefore can’t comment on how far the correction might run, but would note that the depth and liquidity offered in government bond and foreign exchange markets could see the dollar, Japanese yen, and euro acting as exit valves in the event that the selloff intensifies.

Traders are ramping up wagers on a Bank of England rate cut by year’s end after inflation unexpectedly stalled last month. Contrary to both private-sector and official forecasts for a reading above 4 percent, headline consumer prices rose 3.8 percent year-on-year in September—unchanged from August—while core measures eased and a key services gauge held steady at 4.7 percent. Market pricing now implies relatively strong odds on a move in December, with swap probabilities rising from under 40 percent to above 70 percent, and sterling has slipped roughly 60 pips in spot trading. This may prove overdone: inflation remains well above target, and it could take time to persuade a majority on the Monetary Policy Committee that underlying pressures are decisively softening—but the outlook for a narrowing in UK-foreign rate spreads has clearly brightened.

In Canada, yesterday’s slightly stronger inflation reading failed to shock markets, leaving the loonie little changed and pushing odds on an October rate cut back to Monday’s 70-percent level. Consumer prices rose 2.4 percent year-on-year in September, surpassing the 2.2 percent consensus, though much of the increase was driven by higher gasoline and food costs. While the Bank of Canada’s preferred core measures remained somewhat elevated, the share of components running above 3 percent eased to 37 percent from 39 percent in August, and indices that strip out the most volatile items stayed comfortably within the target range. The picture has grown more nuanced, but policymakers appear broadly satisfied with the inflation trajectory—and with growth and employment risks tilting to the downside, a rate cut at next week’s meeting still looks more likely than not.

The yen is edging higher as traders temper expectations for Sanae Takaichi’s policy approach. Japan’s new prime minister yesterday announced an economic stimulus package designed to help offset inflation pressures on households and businesses, but hinted that bazooka-style spending would be avoided in favour of carefully-targeted energy subsidies and grants. Takaichi has adopted a more measured stance on the Bank of Japan’s independence since winning party elections earlier in the month, telling reporters that she doesn’t see a need to review relations with the central bank now, and that monetary policy settings remain outside her remit. The yen could remain under pressure for a while yet, but another disorderly leg lower is becoming less likely.

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