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Treasury yields are retreating from multi-decade highs, helping relieve pressure on equity and foreign exchange markets. North American stock markets look set to open in the green and the dollar is putting in a mixed performance, but the risk-sensitive Canadian dollar is inching lower, and background volatility measures are creeping up.

Bond yields moved higher in yesterday’s session after home prices resumed their rise, with the S&P CoreLogic Case-Shiller 20-city index climbing for a fifth month in July – a development that could indicate financial conditions are still too loose, and one that suggests inflation might remain sticky for longer. The Minneapolis Federal Reserve’s President Neal Kashkari – once one of the more dovish members of the Federal Open Market Committee – said “”If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off”. “Once supply factors have fully recovered, is policy tight enough to complete the job of bringing services inflation back to target? It might not be, in which case we would have to push the federal funds rate higher, potentially meaningfully higher,” he said. “Today I put a 40 percent probability on this scenario.”

The Fed’s stance stands in stark contrast with other major central banks. The European Central Bank’s Madis Muller said further rate increases look unlikely, the Bank of England has signalled a desire to stay on hold for a prolonged period, and the Bank of Japan is increasingly likely to maintain its loose monetary policy settings through year end, if not beyond.

Crude oil prices keep barrelling toward the $100 mark, with West Texas Intermediate trading at $92 and the Brent benchmark going for $95. Markets seem to be running on self-reinforcing momentum here – US inventories are pointing to a near-term shortfall, but global demand growth remains soft and non-OPEC supply levels should increase through the winter months – implying that a reversal could come within weeks. Much depends on how Saudi Arabia wants to guide markets, and on whether the downside risks associated with unsheathing Russia’s “oil weapon” continue to outweigh the strategic benefits.

The onshore Chinese yuan is modestly stronger after staging a rally at the end of the Asian trading session, suggesting that authorities were intervening to stabilize markets ahead of the liquidity-challenged Golden Week holiday. According to several news agencies, state-owned banks sold the dollar and cut yuan lending volumes, while the People’s Bank of China pushed the most liquidity into reverse repo markets since February – steps that are strongly indicative of concerns about extreme moves amid thin trading conditions. We should note that we think Chinese markets could be oversold here – Western alarmism has probably gone too far – and are bracing for a sharp recovery in onshore markets at some point in the coming month.

Japanese traders remain on intervention watch, monitoring for signs of Bank of Japan “rate checks” after Finance Minister Shunichi Suzuki’s “high sense of urgency” comments earlier in the week. In prior interventions, the central bank has contacted foreign exchange desks at the major banks, asking for two-way executable quotes on the yen before beginning its buying activity – and markets are now conditioned to front-run such efforts.

The US government is still on course toward a shutdown late Saturday evening. A bipartisan group of Senate Democrats and Republicans pushed stopgap spending legislation forward in a procedural step last night, but it is expected to face stiff opposition if it hits the House by Friday. Speaker Kevin McCarthy, facing expulsion by members of his own party, may refuse to bring it to the floor for a vote, and far-right Republicans are likely to remain staunchly opposed to its Ukraine support provisions. Consensus estimates suggest that the US economy could suffer a hit amounting to 0.2 percent of gross domestic product every week during a shutdown, with history suggesting that the intransigent party is likely to be punished in the polls. More perversely, the government’s fiscal trajectory will remain fundamentally unchanged.

Still Ahead


US durable goods orders – an important variable in the overall business cycle – should fall by less in August relative to the prior month, with ex. transportation spending remaining strong and underlying business investment levels staging a recovery on an improved earnings outlook for many of America’s bellwether consumer brands. (08:30 EDT)


The Canadian payrolls numbers (less timely than the Labour Force Survey) should illustrate a softening in job vacancy numbers and underlying labour demand in July, but won’t shed much light on current conditions. Upside surprises are unlikely to impact markets – most participants are convinced the economy is losing momentum – while a downside shock could reinforce already-bearish positioning. (08:30 EDT)

Mexico’s central bank is seen holding rates again, and indicating that it will continue to do so for a while yet. Inflation has slowed, but remains far above the policy target, domestic demand is going strong, and the government is opening the spending taps ahead of next year’s presidential election. The peso’s strongly-positive carry profile should remain intact for now. (15:00 EDT)


Underlying euro-area inflation pressures should continue cooling in September. Consensus estimates suggest that headline prices rose 4.5 percent year-over-year in the month, down from 5.2 percent in the prior month, with the core measure slipping to 4.8 percent from 5.3, but the data could surprise to the downside as base effects, statistical adjustment issues, and a drop in services demand contrive to put downward pressure on price calculations. (05:00 EDT)

The Federal Reserve’s preferred inflation indicator is expected to climb at an annualized pace consistent with the central bank’s target in August. The core personal consumption expenditures index is seen pushing just 0.2 percent higher, with personal income rising 0.4 percent, and spending growth slowing from the previous month’s 0.8 percent to 0.4 percent. We expect the first negative spending prints to come within months as excess savings are wound down, student loan repayments ramp up, and employment conditions cool – but the US consumer has repeatedly proven us (and markets) wrong this year, so we can’t rule anything out. (08:30 EDT)

Canadian growth data for July are likely to align closely with Statistics Canada’s initial estimate, with the expansion flatlining as consumer spending weakens and business investment hits a wall. But a number of transitory effects – including strikes and forest fires – could plague the data, obscuring any meaningful signal. Markets will focus more closely on the advance estimate for August. (08:30 EDT)

Market Retreat Continues as Yields Climb
Hawkish Kashkari Comments Pour Cold Water on Markets
Market Momentum Fades After US Long Weekend
No news is good news
Dollar Cruises Toward Weekly Gain on Fading Easing Expectations
Twists & turns

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