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Caution Prevails as First Quarter Winds Down

Financial markets remain broadly rangebound this morning as month- and quarter-end position squaring drives investors to cut risk. The dollar is essentially unchanged, Treasury yields and crude prices are softening, and North American equity bourses are setting up for a weaker open.

More evidence of strength in the US economy was delivered yesterday. Data releases showed home prices climbing at the fastest annual pace since 2022 in January, durable goods orders rising more than expected in February, and the Conference Board’s measure of consumer confidence ticking higher in March. The “no-landing” consensus among economists keeps growing more pervasive, bolstered by the Atlanta Fed’s updated nowcasting model, which shows gross domestic product on track to hit 2.1 percent in the first quarter.

Asian currencies are coming under sustained selling pressure, led by the yen and yuan. Japan’s currency bounced off a 34-year low last night after coming within a hair of triggering options struck at the 152 mark, recovering only slightly after officials from the Ministry of Finance, Financial Services Agency, and Bank of Japan met, ostensibly to discuss intervention procedures. The Chinese renminbi kept slipping, with traders – concerned about weak growth, poor investor sentiment, and practically non-existent inward capital flows – ignoring higher official fixings to push the onshore exchange rate toward the 7.23 threshold.

Currency markets remain remarkably calm. With inflation risks subsiding, growth differentials ossifying across the developed economies, and central banks singing off the same hymn book, both implied and realised volatility levels in the foreign exchange have plunged to lows typically seen ahead of unexpected shocks.

The Canadian dollar remains depressed as traders brace for a lacklustre gross domestic product report tomorrow. We remain convinced higher borrowing costs will take a bigger toll on the Canadian economy as the year progresses, but the risks going into tomorrow’s preliminary February estimate look somewhat asymmetric, with an upside surprise carrying the potential for a bigger market reaction. With consumer spending showing signs of a modest acceleration, homebuilding activity rebounding, hours worked rising, and exports on a solid footing, a narrowing between expected growth trajectories in the US and Canada cannot be ruled out.

Today’s agenda looks extremely quiet, with one key exception: Federal Reserve Governor Christopher Waller will deliver an outlook at the Economic Club of New York at 6:00 this evening. Waller is known as one of the more influential members of the central bank’s policy committee, having played a key role in establishing the “soft landing” thesis almost two years ago, signalling a pivot toward easing in November, and more recently delivering a speech entitled “What’s the Rush?” in which he argued that rate cuts weren’t yet necessary. A more strident pushback on easing expectations could cast a different light on last week’s statement of economic projections – which to us, looked far more hawkish than markets believed at the time.

Still Ahead


The Canadian economy probably grew slightly slower than Statistics Canada’s 0.4-percent early estimate in January, and with the rebound largely coming from a cessation in public sector strike activity, it should remain clear that all is not well in the broader economy. February’s preliminary number might look better though – oil prices are up, housing markets are seeing a flurry of activity, and the number of hours worked is rising. We don’t rule out an early-year rebound in growth that tops the Bank of Canada’s last 0.5-percent estimate for the first quarter. (08:30 EDT)

Canada SEPH January’s Canadian Survey of Employment, Payrolls and Hours should show job vacancies declining further, while wage growth continues to soften. (08:30 EDT)


The Federal Reserve’s preferred inflation indicator – the core personal consumption expenditures index – likely slowed in February, with early estimates suggesting that the month-over-month increase dropped to 0.3 percent, down from 0.4 percent in the prior month. Surprises are unlikely: both the consumer price index and producer price index anticipate the print, and during last week’s post-decision press conference, Jerome Powell said he expected a print “well below 30 basis points,” suggesting that the seasonal issues that plagued January’s report would begin to fall out of the data. Strong hiring, hours worked, and wage growth should help keep the personal income and expenditures numbers aloft, pointing to continued resilience in US consumer spending levels. (08:30 EDT)

North American markets are closed for Good Friday, and currency market liquidity will be thin, potentially exaggerating the impact of any unusual developments.

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