Good morning. The dollar is edging lower as tensions in the Middle East show signs of easing and technology shares advance on a renewed wave of optimism. Brent is trading below $99 a barrel — down from $108 a week ago — after Saudi Arabia restarted its East-West pipeline and Reuters reported that Iran is willing to reopen the Strait of Hormuz within seven days if America lifts its blockade. Valuations are climbing across the artificial intelligence sector after Meta’s new assistant, Muse, received positive reviews and a pickup in users, helping justify massive capital expenditures from the major hyperscalers.
Currency markets are largely becalmed, with the euro, pound, Canadian dollar and yen trading almost unchanged as the pace of economic data releases slows to a trickle, leaving markets to interpret mixed signals from policymakers.
Federal Reserve officials are sounding resolutely hawkish. Chicago Fed president Austan Goolsbee yesterday argued that central banks can no longer rely on the old orthodoxy of “looking through” commodity-driven jumps in inflation. Speaking at the Official Monetary and Financial Institutions Forum in London, he warned that large supply shocks had become a regular occurrence, arriving more frequently, hitting harder, and lasting longer—the pandemic snarled global logistics networks for years, tariffs have been escalating for nearly two, and oil prices have remained elevated for months—giving the Fed little choice but to raise rates further, even if doing so penalises sectors where the shocks did not originate. In an interview with Reuters later in the day, St. Louis Fed president Alberto Musalem said “earlier and incremental policy firming is better and less disruptive than later and larger and potentially more abrupt policy action”, adding that “it’s crucial that policy puts a meaningful restraint on inflation”.
In contrast, Bank of Canada governor Tiff Macklem sounds more cautious, warning that opposing forces are pulling the economy in different directions and making it difficult to separate the cyclical forces that might shape demand in the short run from longer-lasting structural dynamics. Speaking in Halifax yesterday, he said the latest round of US tariffs is unlikely to do much direct damage to the economy as a whole, given their narrow scope and the offsetting effects of government support; but heightened uncertainty could once again cripple business investment and consumer spending, roughly halving fourth-quarter growth to below 1%. Although there is, as yet, little sign that higher energy prices are spreading into other goods and services, with oil prices high and fuel costs soaring, the risk of such spillovers is mounting. “Trade uncertainty will weigh on demand. Higher energy prices will keep inflation up,” he said. “One creates downside risks to growth, the other upside risks to inflation”. This comes after a surprisingly-hawkish Bank decision in early September put upward pressure on the Canadian curve, sharply raising rate expectations over the next year.
