Market Briefing: Dollar inches upward after a bruising week
Investors betting on policy “pivots” from the US Federal Reserve and the Chinese government are trimming their bets this morning, helping the dollar recover some ground against its major-currency rivals. Treasury yields are up slightly, and oil prices are weakening as last week’s ebullience fades in the face of a still-subdued economic outlook.
The dollar suffered its biggest decline since the global financial crisis last week after the latest consumer price index report showed inflation pressures subsiding more quickly than expected. Yields on two- and 10-year Treasury instruments plunged as investors lowered terminal rate forecasts, expecting the Fed to respond to weaker price growth by slowing and then pausing its tightening efforts.
We think the dollar decisively peaked in late September, but speculators could find that rallies - triggered by surges in yields and flights to safety on both ends of the risk spectrum - might continue to punctuate trading activity and destabilize currency markets through year end.
Hopes for a shift in China’s “zero-covid” policies were given new momentum on Friday when the National Health Commission delivered a 20-point list of rule changes aimed at relaxing quarantine requirements for travellers and restraining contact tracing procedures for citizens. Data out this evening is expected to show the economy struggling with a lack of domestic demand as the government’s lockdowns impact consumer sentiment and weigh on overall activity levels.
China’s crackdown on the property sector is also showing signs of easing. A number of news outlets are reporting that authorities have approved a relaxation in leverage requirements and are encouraging lenders to extend loan terms for beleaguered developers - steps that could help reduce stress in what has long been one of the world’s biggest and most important real estate markets.
But China’s coronavirus regime remains the world’s most draconian, and the country’s debt overhang continues to threaten long-term growth. The government is unlikely to shift direction in a decisive manner, choosing instead to follow a long-standing pattern of “crossing the river by feeling for the stones” - proceeding more cautiously than investors are expecting.
Vote counting continues in the US midterm elections. The Democrats have won the Senate, and the Republicans seem to be headed toward a narrow House majority, setting the stage for a period of persistent legislative gridlock - something that markets typically welcome. As Ronald Regan once put it, “The top 9 most terrifying words in the English Language are: I'm from the government, and I'm here to help”.
The Democratic leadership is reportedly working on a debt ceiling authorization that can be passed during the “lame duck” session before year end. This will provide fodder for attack ads from the (equally-profligate) Republicans, but would likely trigger a surge in risk appetite as investors stop worrying about a near-term repeat of the debt standoffs and government shutdowns that have repeatedly plagued the political landscape over the last two decades.
Today’s agenda looks relatively quiet, with Fed speakers Brainard and Williams scheduled to speak, Japan set to release third-quarter gross domestic product, and China printing a slew of domestic activity indicators.
A raft of data prints will provide insight into how conditions are evolving in the US economy on Wednesday morning, with investors broadly expecting to see more evidence of an incoming slowdown. Retail sales are seen rising 0.9 percent in October as consumers replace cars damaged by Hurricane Ian, but “control group” sales - with food, vehicles, gasoline, and building products excluded - could look much weaker. Industrial production growth will be mixed, with vehicle manufacturers and energy producers bucking a wider deceleration. Business inventories are very likely to show a continued rise in September, if earnings calls can be believed. And the National Association of Home Builders index should continue its descent as the lagging impact of the Feds tightening efforts hits prices and sales volumes.
Wednesday will also bring Canada’s latest inflation numbers, which are expected to rise slightly from the prior month as gasoline prices rebound. The year-over-year change headline consumer prices is seen touching 7 percent - up from 6.9 percent in September, but well below the 8.1 percent peak hit in June. More critically for markets - and for the Bank of Canada’s policy stance - month-over-month changes in the “trim” and “median” price measures should continue moderating as property markets tumble and consumer demand begins to cool. Markets currently expect the Bank to hike rates by another quarter point in December before pausing to assess the impact on the economy.
Newly-minted UK Chancellor of the Exchequer Jeremy Hunt will deliver his first Autumn Statement on Thursday, setting out a fiscal consolidation plan designed to allay market worries after his predecessor triggered a collapse in confidence. He is expected to announce a package composed of tax increases and spending cuts totalling 50 billion pounds over the next five years, with markets focusing on the degree to which the government’s austerity measures are “front-loaded”. Ahead of the Statement, economists think tomorrow’s unemployment data will show continued stability in the jobs market, and Wednesday’s inflation report is expected to show year-on-year price growth accelerating to 10.8 percent in October as higher energy prices hit households.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
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