It’s the summer of 2023, and Canada’s biggest exports are wildfire smoke and higher interest rates. Yields are up across most developed economies after the Bank of Canada joined the Reserve Bank of Australia in demonstrating that central bank monetary tightening cycles aren’t yet complete. Equity futures are holding steady, short-term Treasury yields remain elevated, and the dollar is holding yesterday’s against most of its major rivals.

The Canadian dollar is only incrementally higher after the central bank opted to raise rates, suggesting that market conviction was low and investors were well prepared ahead of the decision – but also that the move helped anchor US rate expectations higher. After a steady drumbeat of “skip” messages from Federal Reserve officials, investors are assigning just one-in-three odds to a rate hike at next week’s meeting, but May inflation numbers – due on Tuesday – could raise the likelihood of a Canadian-style surprise, and would almost certainly push the likelihood of a hike by July above the current 70-percent threshold. In the interim, we will be watching Wall Street Journal reporter Nick Timiraos’ (current Fed whisperer) Twitter account for signs of an off-the-record shift in policy expectations. Failing that, we expect to see policymakers deliver fairly explicit hawkish forward guidance around the decision itself.

The euro is inching higher even after a third data revision showed the common currency area falling into a technical recession in the first quarter. According to updated numbers released by Eurostat, the economy shrank -0.1 percent in the first three months of the year, following a similar contraction in the fourth quarter of 2022. This met the commonly-understood definition of a recession, but the data contained a number of quirks that made the picture less worrisome for market participants: changes in inventories and government spending drove much of the headline adjustment, and the bloc actually posted a modest expansion with the highly-idiosyncratic Irish economy excluded.

With the European Central Bank likely to stay focused on fighting stubbornly-high levels of core inflation, monetary policy expected remain largely unchanged. After fairly blunt guidance from Madame Lagarde and others, policymakers are widely believed likely to deliver another quarter-point hike at next week’s meeting, with one more following in July before an extended pause begins. As signs of softness emerge in sentiment surveys, industrial production numbers, and credit conditions, market focus will likely centre on updated growth and price projections, with a more hawkish outlook raising the odds on a final move in September.

Ahead today, the number of initial claims for US jobless benefits is expected to rise toward 235,000 in the week ended June 3, up incrementally from 232,000 in the prior week. Wholesale inventories are seen shrinking -0.2 percent in April. Bank of Canada Deputy Governor Paul Beaudry is expected to provide more insight into the reasoning behind yesterday’s rate hike in this afternoon’s speech and press conference. And Chinese consumer prices are projected to rise 0.3 percent year-over-year in April, while producer prices – heavily influenced by commodity inputs and supply chain disruptions – are likely to decline, perhaps by as much as 4.5 percent relative to May 2022.