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Dollar eases amid heavy macro data flow

The US dollar and yields are edging lower after the US Treasury surprised investors by lowering its estimates for government borrowing in the fourth quarter, helping ease fears of a supply-led melt-up in rates. According to yesterday’s release, net issuance is expected to hit a record $776 billion over the final three months of the year, but this is down from the $852 billion projected in late July as higher-than-anticipated tax receipts help offset funding requirements. Tomorrow morning’s issuance plan – which will outline the cadence and scale of auctions – could have a more meaningful effect on the rates curve however, with markets remaining worried that the volume of long-dated instruments could swamp demand.

Commodity prices are broadly under pressure after China’s manufacturing sector fell back into contractionary territory and growth in services slowed, squelching hopes of a rapid rebound in the world’s second-largest economy. The official factory purchasing managers’ index fell to 49.5 in October from 50.2 in September, and the wider composite index dropped to the lowest level this year. The data, which may have been distorted by the Golden Week holiday earlier in the month, suggest that the economy is struggling to recover from a deliberate hobbling of its two major growth engines – exports and property development – necessitating more government stimulus in the months ahead. The yuan, which has been to all intents and purposes re-pegged to the US dollar, remains firmly rangebound around the 7.31 mark in onshore markets.

The Bank of Japan took an important step toward abandoning its yield curve control policy, and markets shrugged. In a long-awaited move, the central bank announced it would stop capping ten-year government bond yields at 1 percent, instead using that threshold as a “reference”point, and said it would halt daily fixed-rate bond purchases, limiting unintended “side effects” on the financial system. Policymakers also raised their inflation projections for the 2024 fiscal year to 2.8 percent from 1.9, and left benchmark rate at -0.1 percent. The yen weakened, pushing through the 151 threshold against the dollar as traders looked through the confusion to bet on rate differentials remaining extremely wide.

The euro is also on the defensive after growth slowed and inflation decelerated more than expected this month, helping pull European Central Bank rate cut projections forward. Eurostat said the economy shrank -0.1 percent in the third quarter, down from a revised 0.2-percent gain in the second as downturns in Germany and Austria offset modest improvements in France and Spain. Headline consumer prices rose 2.9 percent in the year to October – down from the previous month’s 4.3 percent, and lower than the 3.1 percent consensus forecast – while the core measure slopped from 4.5 percent to 4.2 percent. Investors are now assigning near-coin-toss odds to a rate cut by the central bank’s April meeting, marking a drastic reappraisal relative to a few months ago.

Negative rate differentials are keeping the Canadian dollar under pressure ahead of this morning’s gross domestic product print. With housing markets slowing, consumer spending under pressure, and business investment turning down, market participants are bracing for nearly-flat growth through the third quarter, helping tilt the balance of risks toward Bank of Canada rate cuts by the middle of next year. Market-implied rate projections have converged materially in the last month, but we continue to expect Canada’s central bank to match or outpace the Federal Reserve in delivering accommodation next year, limiting the loonie’s upside participation in any broad-based dollar decline.


Still Ahead

TUESDAY

Updated numbers from Statistics Canada are likely to show activity expanding by less than 0.1 percent in August, putting the economy on course toward a second consecutive quarter of stagnation. With the manufacturing sector in contraction, residential investment slowing, and consumer spending showing clear signs of rolling over, interest rate sensitivities are having real-world effects, making further monetary tightening from the Bank of Canada ever less likely. (08:30 EDT)

Gains in the Federal Reserve’s preferred measure of wage growth – the Employment Cost Index – are seen decelerating to 4.3 percent year over year in the third quarter, down from 4.5 percent in the prior three months. This will remain above levels consistent with a dampening in excess demand in the US economy, and – combined with other tight labour market indications – could force central bankers into maintaining a hawkish communications bias even as financial conditions tighten. (08:30 EDT)

WEDNESDAY

With post-debt ceiling funding needs remaining elevated, US Treasury officials are expected to announce a significant increase in coupon auction sizes across the curve, but could tilt the bulk of issuance toward shorter-term maturities as they attempt to address a loss of appetite among domestic investors for longer-dated instruments. After fears of a “buyers strike” helped elevate Treasury term premia in recent months, markets will be watching closely to assess whether the volume of planned issuance across maturity buckets could overwhelm demand. (08:30 EDT)

The number of positions available in the US probably slipped only incrementally in August, with skills mismatches helping support demand for workers in a number of understaffed sectors, even as others began to soften. Consensus estimates suggest that the Job Openings and Labour Turnover Survey will show vacancies dropping from 9.6 to 9.2 million in the month, with the quits rate – a proxy for worker confidence levels – holding near 2.3 percent. (10:00 EDT)

Policymakers at the Federal Reserve will almost certainly opt to hold interest rates at prevailing levels as they “proceed carefully,” but with labour markets staying tight, consumer balance sheets retaining considerable spending capacity, oil prices holding at elevated levels, and growth routinely topping forecasts, the case for further tightening remains surprisingly undiminished. A solidly-hawkish bias is to be expected in the statement and post-meeting press conference, with markets listening carefully for a shift in language around the idea that recent increases in long-term yields – blamed on the “term premium” by Jerome Powell, and on improved growth prospects by Janet Yellen – are lifting rates into “sufficiently restrictive” territory. We expect less-senior officials to resume pivoting in a more dovish direction as recessionary signals multiply in the coming months, but this meeting is unlikely to provide an appropriate venue. (14:00 EDT)

THURSDAY

The Bank of England’s Monetary Policy Committee is widely expected to leave the key rate unchanged at 5.25 percent for a second meeting, with Chief Economist Huw Pill’s “Table Mountain” approach to policy looking increasingly likely to play out in reality. After a long series of positive surprises, growth has slowed, unemployment has risen, and wage growth is easing, helping pull market-implied odds on a final rate hike below coin-toss levels. Updated forecasts should show further increases in unemployment in coming months, with price targets and monetary policy settings reverting toward normal levels over a longer time horizon. (08:00 EDT)

The number of initial claims for jobless benefits submitted last week should hold near the prior week’s 210,000 mark in the absence of a downside catalyst – but some softening could become clear over the succeeding releases. (08:30 EDT)

FRIDAY

October’s non-farm payrolls print might exhibit signs of mean reversion, with job growth halving from September’s astonishing 336,000-strong print. Hiring in the leisure and hospitality sector is likely to revert lower after a temporary surge, ongoing strike activity could spill over into wider conditions, and the unemployment rate should tick up, approaching the 4-percent threshold that some have flagged as providing early warning of a downturn. (08:30 EDT)

The Canadian economy is believed to have added roughly 20,000 roles in October after a 63,800-position gain in the prior month, but the unemployment rate is seen rising to 5.6 percent from 5.5 percent as population growth exceeds job creation. A downside surprise is possible – signs of slowing momentum are obvious throughout most sectors of the economy – but evidence of strain in labour markets could still take a few months to arrive. (08:30 EDT)

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