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Dollar Advances As Yields Climb

With ten-year Treasury yields poking above the 4 percent threshold once again, the dollar is the only outperformer on the currency league tables this morning. The greenback is trading near a one-month high, posting gains against all of its major counterparts as risk appetite turns more subdued ahead of a speech from formerly-hawkish Federal Reserve Governor Waller at 11:00.

The British pound is roughly -0.7 percent weaker after wage growth slowed sharply, supporting bets on an early pivot to easing from the Bank of England. Regular pay growth excluding bonuses cooled to 6.6 percent year over year in the three months ended November, down from a revised 7.2 percent in the prior period. On a real, inflation-adjusted basis, wages were up 1.4 percent, helping put a floor under household consumption even as the economy slows. The statistical agency’s Labour Force Survey – the underlying source of much of the UK’s key employment data – remains on hold amid a plunge in response rates, but experimental numbers showed unemployment holding at 4.2 percent.

Markets think Canada’s consumer price index fell -0.3 percent in December from a month earlier, slowing from the 0.1 percent gain seen in November on a decline in energy costs. On a year-over-year basis, headline prices are seen climbing 3.4 percent, accelerating from the prior month on a shift in prior-year base effects. Rent and mortgage interest cost increases will remain the largest source of inflationary pressure.

An upside shock could push expectations for the first Bank of Canada cut further out, but inflation surprises have become smaller and less common as lower energy prices, diminishing base effects, and weakening demand for goods and services have dragged headline prints lower. We expect policymakers to shift focus toward managing increasingly-challenging trade-offs between interest rates, financial conditions, and growth in the months ahead.

Canadian inflation rates, annual % change in all-items and core price baskets versus Citi inflation surprise index

Yesterday’s Bank of Canada surveys showed the economy entering an unmistakable downturn, with businesses and consumers reporting growing financial stress and softening demand expectations. The Canadian dollar fell through the 1.34 mark against the greenback, where it looks likely to languish until the US slows more meaningfully – or an ongoing loosening in global financial conditions helps lift the domestic housing market out of its doldrums.

Today’s US economics calendar is thin, with this morning’s speech from Federal Reserve Governor Christopher Waller looming as the only obvious potential volatility catalyst on the agenda. Coming from one of the most hawkish members of the Federal Open Market Committee, Waller’s dovishness in November helped send yields and the dollar lower, but a similar reaction is unlikely now – markets are overwhelmingly convinced of imminent rate cuts, with circa-70-percent odds priced in for March, and 165 basis points in easing expected over the course of the year. If anything, Waller might surprise markets with a more hawkish-than-anticipated stance, jolting yields higher.

Data out this evening is expected to show China’s economy expanded 5.2 percent last year – slightly above the government’s target – but December’s fixed-asset investment, industrial output and retail sales numbers will remain weak. Official stimulus efforts have remained understandably restrained – given the scale of investment misallocation in the Chinese economy – and hopes for a rapid reversal are fading. Speaking at the World Economic Forum in Davos this morning, Premier Li Qianq seemed reluctant to endorse market expectations for more spending, noting that authorities “did not resort to massive stimulus,” in steering the country through the pandemic. “We did not seek short-term growth while accumulating long term risk.”

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