Market Brief: Price action slows across financial markets as investors digest mixed signals

Financial markets are turning more cautious this morning as traders process the implications of an unexpectedly-divided Federal Reserve decision, news of a tentative trade truce between the US and China, and a mixed slate of earnings from the world’s largest technology firms. The dollar is maintaining yesterday’s advance, ten-year Treasury yields are holding near 4.06 percent after posting their biggest one-day gain since July, shares in Meta and Microsoft are selling off ahead of the open after both companies said they were increasing spending on artificial intelligence infrastructure, and Alphabet is gaining after it reported a stronger-than-expected performance in its cloud computing business.

The dollar spiked higher during yesterday’s Federal Reserve press conference when Jerome Powell warned markets not to expect another cut in December. Referencing the extent to which officials are struggling to forge a path between the two halves of the central bank’s price stability and employment mandate, Powell said "In the committee's discussions at this meeting, there were strongly differing views about how to proceed in December," noting that incoming data is still pointing to “nothing more” than a gradual cooling in labour markets, and that inflation remains contained outside tariff-affected goods categories. High-frequency data is pointing to outsized price pressures in imported goods categories:

But imports make up roughly 9 percent of the US consumption basket, meaning that the pass-through to wider measures of inflation has been relatively modest.

Powell’s comments were unusually direct, suggesting that the Fed’s rate-setting committee wants to preserve as much optionality as possible in December. "A further reduction in the policy rate at the December meeting is not a foregone conclusion,” he added. “Far from it, policy is not on a preset course". Traders took the hint, cutting the odds on another quarter-point cut from the Fed this year to around 70 percent, from closer to 90 percent prior.

The Canadian dollar is trading on a slightly firmer footing after the Bank of Canada delivered a hawkish rate cut yesterday, lowering the policy rate while warning markets not to expect additional moves. In the post-decision press conference, Governor Tiff Macklem said "The weakness we're seeing in the Canadian economy is more than a cyclical downturn. It is also a structural transition," but suggested that monetary policy was reaching its limits in helping offset the stress, noting that the current interest rate is at “about the right level to keep inflation close to 2 percent,” and helping to demolish already-slim odds on another move in December.

The euro is marking time ahead of the European Central Bank rate decision in a few minutes. Market participants don’t expect fireworks: officials are likely to describe price risks as roughly balanced, and recent commentary has suggested that the bulk of the Governing Council sees German fiscal stimulus offsetting trade-related growth risks across the forecast horizon, bolstering the case for an extended period on hold. Policymakers haven’t yet gained the confidence needed to definitively call an end to the Bank’s easing cycle, but traders are betting that the policy rate will remain unchanged through the end of 2026, putting the onus on developments in the US to drive moves in the euro-dollar pair.

In a rare moment of détente, Donald Trump and Xi Jinping agreed at a summit in Busan to extend their tariff truce and dial back elements of the trade war that has roiled markets for months. Under the agreement, which has not been provided in any written or legally-binding form, Washington will cut tariffs on Chinese products by 10 percent to 47 percent, in exchange for Beijing’s promise to take “very strong action” on fentanyl precursors, to buy “tremendous amounts” of US soybeans, and to pause threatened controls on rare-earth exports. The deal should offer a modest reprieve for businesses caught in the crossfire between the two strategic rivals, but stops well short of resolving deeper structural tensions, and leaves the Chinese economy grappling with the aftermath of a housing bubble that is depressing household consumption and increasing the country’s reliance on exports.

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