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All talk, no action in markets

The dollar is staging a modest rebound after a cast of hawkish Fed speakers worked to put the rate cut genie back in the bottle yesterday. In a series of appearances, Bowman, Goolsbee and Logan all noted that inflation remained too high and the labour market was still healthy by pre-pandemic standards, and Neel Kashkari told Bloomberg there’d been “no discussion” of lowering interest rates among policymakers. Bets on at least four quarter-point cuts by early 2025 slipped slightly through the session, and Treasury yields retraced some of their gains.

More Fedspeak is in the offing today: Traders are expecting Jerome Powell to deliver relatively market-neutral opening comments at the Research and Statistics Centennial Conference in Washington this morning, with monetary policy guidance updates more likely to come during tomorrow afternoon’s panel appearance at a International Monetary Fund conference. But a flock of relatively centrist officials, including Governors Cook, Barr, and Jefferson – along with the intellectually-influential Vice Chair Williams – are scheduled to speak on economic themes. Investors will be listening closely to see how their views on financial conditions are evolving, and for any evidence of a concerted pushback against yesterday’s hawkishness.

We suspect that doves remain a rare and endangered species on the Federal Open Market Committee, meaning that the dollar and long-term Treasury yields should maintain altitude until data more consistent with a “hard landing” in the US economy begins to arrive – if it does.

Oil prices are holding near a three-month low as evidence of demand destruction accumulates, and equity markets are trading on a generally mixed footing. The Japanese yen is modestly softer on continued dovishness from Bank of Japan Governor Ueda, and China’s yuan is holding firm, remaining strictly contained within the government’s desired trading range. The Canadian dollar continues to drift lower, with consensus forecasts now aligning more closely with our expectations for a move beyond the 1.40 mark early next year.

Consumer expectations for inflation in the euro area jumped in September, helping solidify market consensus behind a sustained plateau in interest rates while delivering some support to a beleaguered euro. The European Central Bank’s monthly survey showed households expecting prices to rise 4 percent over the coming 12 months, up from 3.5 percent a month ago. The positive effect on yield differentials was partially offset, however, by a worsening in recession forecasts, with respondents now looking for a -1.2 percent contraction in economic activity, down from -0.8 percent previously.

The pound is dropping as markets double down on rate cut bets, largely ignoring this morning’s efforts from Bank of England Governor Bailey. Answering questions from reporters after an event in Ireland, he warned “policy is going to have to be restrictive for an extended period,” to bring down inflation, saying “It’s really too early to be talking about cutting rates”. Bailey’s comments follow yesterday’s intervention from Chief Economist Huw Pill, who admitted investors weren’t “unreasonable” in thinking that monetary policy would begin to turn more accommodative by next summer, saying “Rates will hopefully come off their current levels as long as we return inflation to target”.

Note: Due to scheduling conflicts, and barring a major market shock, the next Market Brief will hit your inbox on Friday morning.

Still Ahead


The British economy may have entered the early stages of recession in the third quarter, with gross domestic product seen shrinking -0.1 percent after expanding 0.2 percent in the second. Further declines are likely in the new year as the consequences of the Bank of England’s tightening efforts hit home. (02:00 EDT)

Euro Crisis Flashbacks Hit Markets
European political nerves
Market Calm Returns
US inflation vs the Fed
Fed Signals One Cut in 2024, Down From Three
US Inflation Decelerates Sharply, Bolstering Rate Cut Odds

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