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Blue Monday follows Black Friday

Markets are kicking off the week on a more cautious footing after Chinese data disappointed relative to expectations, pointing to a stronger disinflationary impulse from the world’s second-largest economy. Industrial profits increased just 2.7 percent from a year ago in October, according to numbers published by the National Bureau of Statistics, down from September’s 11.9 percent and August’s 17.2 percent as global demand weakens and a domestic recovery runs out of momentum.

Ten-year Treasury yields are holding near the highest levels in a week, equity futures are retreating, and the dollar is stabilizing as demand for commodity-linked units and emerging-market carry trades subsides. The euro is treading water below the 1.10 mark, the British pound remains essentially unchanged, and the yen is again pushing lower.

US consumers still seem to be spending money they don’t have on things they don’t need. A series of payment and data analytics providers reported stronger-than-expected sales volumes on Black Friday, with estimates from Adobe, Mastercard, Salesforce, and Shopify pointing to record receipts, with year-over-year growth levels on par with the years immediately preceding the pandemic in 2020 – although with online transactions increasingly cannibalizing in-store sales, it could take time to develop a clear picture of underlying demand.

The coming days should bring more evidence supporting the “soft landing” thesis that has animated markets for the last month. Thursday’s personal income and consumption data are expected to show spending and price growth slowing last month, while Friday’s Institute for Supply Management survey should show the manufacturing sector staging a modest recovery. By our reckoning, at least six Fed officials—including Jerome Powell—are scheduled to speak, with all likely to deliver variations on the more-dovish-but-still-data-contingent message that has dominated communications since early October.

This mix could add momentum to year-end seasonal factors in pushing the dollar lower. In what has become an annual tradition, consensus forecasts are again overwhelmingly bearish on the dollar, and portfolio rebalancing flows are beginning to play a powerful role in driving price action. We doubt this will prove sustainable – the disconnect between investor ebullience and signs of weakness in the economy should ultimately resolve itself in the form of a market correction – but for now, the move has legs.

Oil benchmarks are down on speculation that global demand weakness will ultimately drag prices lower – even if some OPEC+ members join Saudi Arabia and Russia in announcing production cuts when the group meets again on Thursday. With the US increasing output at a steady clip while Asian consumption falls relative to suspiciously-high levels earlier in the year, time spreads are increasingly indicative of an incoming supply surplus, and speculative positioning has turned firmly bearish.

The Canadian dollar, far more closely linked with changes in global risk sentiment than with oil prices or domestic fundamentals, is trading modestly lower. The currency popped almost 90 pips higher on Friday morning after updated numbers suggested that Canadian households had lifted spending by 0.8 percent in September, but soon returned its gains as traders reviewed the underlying details – which showed core sales dropping by -0.3 percent, with overall volumes down -0.7 in the last four months. Few expect the Bank of Canada to deliver additional hikes in this cycle, with markets now firmly focused on when cuts might begin.

TUESDAY

The Conference Board’s measure of US consumer confidence is seen weakening further in early November, with the overall index tumbling to 101 from 102.1 in the prior month as households react to growing evidence of slowing growth. (10:00 EDT)

THURSDAY

Euro area consumer price growth likely decelerated further in November, helping mute any remaining hawks on the European Central Bank’s Governing Council. Headline inflation is seen easing to 2.7 percent year-over-year, down from 2.9 in the prior month, while the core measure might have slipped closer to 3.8 percent from 4.2 previously. This shouldn’t support a dramatic change in the central bank’s rhetorical stance – officials will likely maintain an aggressive inflation-fighting posture for many months yet – but with markets overwhelmingly convinced policy has been overtightened, might support further narrowing in expected cross-Atlantic rate trajectories for next year. (05:00 EDT)

Personal income and consumption numbers should show US household demand beginning to ebb in October, giving the Fed room to maintain rates at current levels through the early part of next year. With labour markets showing clear signs of exhaustion, wage gains should slow, with investment returns doing the heavy lifting in keeping income gains – narrowly – on the positive side of the ledger. Spending levels are widely expected to slow, dropping to 0.2 percent month-over-month, down from 0.7 percent in September – but an upside surprise is certainly possible, given consumers’ recent propensity to spend more than they earn. And the central bank’s preferred inflation indicator – the core personal consumption expenditures index – is seen slowing further, falling to 0.2 percent month-over-month and 3.5 percent year-over-year. (08:30 EDT)

The Canadian economy likely dipped into a technical recession in the third quarter, with updated numbers expected to confirm Statistics Canada’s preliminary estimates. Data out in October showed activity contracting an annualized -0.1 percent in the three months ended September, following a -0.2 percent decline in the prior quarter. This, in and of itself, is unlikely to impact the Canadian dollar – traders already expect the central bank to stay on hold before beginning to cut rates in mid-2024 – but the preliminary estimate for October could easily move markets, helping determine whether the easing timetable should be moved up. (08:30 EDT)

FRIDAY

We are looking for another decline in job creation in Canada’s November Labour Force Survey, adding to October’s print in offsetting strong gains through August and September. Even if the headline is positive, the mix between full- and part-time jobs will be critical in discerning the underlying trend, with seasonal retail hiring ramping up even as a profound slowdown in the services sector drags down growth. The unemployment rate is likely to rise as labour markets fail to absorb higher immigration levels. (08:30 EDT)

The Institute for Supply Management’s manufacturing gauge likely stayed in contractionary territory in November, but a modest pickup in demand should mean that the pace of deterioration has slowed somewhat. Markets will review respondent anecdotes closely however, with more talk of “recession” helping moderate any potential revival in animal spirits. (10:00 EDT)

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