The dollar is heading toward an eighth day of gains as fixed-income traders pull back on monetary easing expectations and brace for hawkish undercurrents in this afternoon’s Federal Reserve meeting minutes. Ten-year Treasury yields are holding above the 4-percent threshold, North American equity futures are softening on the prospect of renewed antitrust action against Google’s parent company, and most major currencies are stuck in a defensive posture against the almighty greenback.
In theory, minutes taken during last month’s Fed meeting should be stale on arrival, but could move markets nonetheless. Policymakers ultimately opted for an outsized half-percentage-point rate cut in September, but were clearly uncertain ahead of the decision: the three rate cuts set out by many officials in the “dot plot” summary of economic projections (which is largely prepared ahead of time) don’t align with the four that will now likely be delivered before year end, suggesting that Chair Powell did a lot of cajoling during the meeting itself. If the minutes show “many” committee members remaining confident in employment conditions and wary of a reacceleration in inflation risks, with “most” favouring smaller rate-cut increments going forward, yields and the dollar could move higher.
Inflation surprises have become smaller and more negative in recent months, but the risk of an upside shock in tomorrow’s consumer price index release will keep traders wary for now. Consensus estimates suggest that the headline index rose 0.1 percent on a month-over-month basis in September – down from 0.2 percent in August – while the core index, which excludes food and energy categories, is seen rising 0.2 percent, down from 0.3 percent. Shelter price growth – which has begun to slow in recent months – represents an important wild card, carrying the potential for renewed strength and for an upset of current market pricing.
Officials continue to sing from a gradualist hymnbook. Vice Chair Philip Jefferson yesterday told an audience in North Carolina: “Employers added an average of 186,000 jobs per month during July through September, a slower pace than seen early this year,” calling the cooling in labour markets “noticeable”, and saying “The balance of risks to our two mandates has changed – as risks to inflation have diminished and risks to employment have risen, these risks have been brought roughly into balance”. Atlanta’s Raphael Bostic noted that another half-percentage-point rate cut remained possible in coming months, but that the September jobs report gave central bankers “the luxury of being a bit more patient” in easing policy.
A widely-watch gauge of uncertainty among US small business owners hit a record high last month, but we would caution against drawing conclusions about the direction of the economy from it*. The National Federation of Independent Business yesterday said that its Small Business Uncertainty Index jumped by 11 points to 103 in September – seemingly suggesting that hiring and investment activity is set to slow – but a quick glance at the historical record shows that spikes in the indicator are more closely associated with elections than with any change in underlying fundamentals.
Global crude benchmarks continue to inch lower even as energy traders remain alert for signals emanating from Israel, with a response to last week’s Iranian missile attack expected to come within days. Speculation in the last 24 hours has built around the prospect of a meaningful and technically-difficult assault on Tehran’s military infrastructure, coupled with a more covert increase in espionage activities – instead of the hit to oil production and distribution facilities that was mooted by President Biden and other observers last week – but price action in options markets suggests that demand for insurance against a more escalatory strike package remains strong.
Weaker oil prices helped drive the Canadian trade balance further into negative territory in August, adding to selling pressure on the currency. Data released by Statistics Canada yesterday showed the country posting a -$2.4 billion dollar goods and services deficit in the month, with softer crude exports doing a lot of the heavy lifting in offsetting higher imports of auto vehicles and parts. August marked Canada’s sixth consecutive monthly deficit, helping mark a reversal to the trend that dominated throughout much of the post-global financial crisis period, and underlining the extent to which the country should not be viewed as a “petrostate” in financial markets.
Chinese share prices and the yuan are stabilising after the Ministry of Finance scheduled a press briefing for Saturday, suggesting that authorities are preparing to announce a more meaningful fiscal stimulus package. The announcement comes after the National Development and Reform Commission disappointed investors by delivering a series of reassuring platitudes during yesterday’s hotly-anticipated post-holiday press conference, triggering a reversal in the spectacular rally that has seen the country’s total equity market capitalisation jump by more than 37 percent in less than two weeks.
We think officials will do their best to meet market expectations in the middle, raising government borrowing targets without unleashing the sort of whatever-it-takes stimulus push that could risk fuelling a 2009-style surge in private sector credit creation. China’s central government balance sheet is still in relatively good shape, but high levels of corporate leverage mean that the country remains incredibly indebted for an economy at its per-capita income level, and policymakers remain wary of adding to existing imbalances. If we’re right, the renminbi could continue its grind higher, but at a far more gradual pace than seen in the last two weeks.
*To speak frankly, most US business and consumer sentiment surveys should be viewed with a heavy dose of scepticism at the moment. The population has become polarised to the point that basic facts about the economy are up for debate, and results are generally heavily inflected by partisan bias. It might be wiser to look at what businesses and consumers are doing, not saying.