The dollar is recovering, ten-year Treasury yields are pushing higher, and risk sentiment is worsening as traders further downgrade odds on rate cuts from the Federal Reserve, forcing investors to brace for a modest tightening in financial conditions. The Canadian dollar is surging on an unexpectedly-strong jobs report, which is also lowering expectations for an accelerated pace of monetary easing in coming months.

The Bureau of Labor Statistics yesterday reported an unexpectedly-large increase in underlying inflation. The core consumer price index – which excludes food and energy costs – climbed 0.3 percent month-over-month in September, reversing a period of declines and lifting the three-month annualised pace of inflation to 3.1 percent, slightly above the Fed’s target range.

Bafflingly, a jump in weekly initial unemployment claims helped offset the inflation report’s impact on markets, temporarily depressing yields. According to the Bureau of Labor Statistics, 258,000 people applied for jobless benefits in the week ended October 5, well above the previous week’s 225,000, but a closer examination of the data shows that the jump was mostly driven by an increase in claims across Hurricane Helene’s trajectory, along with a work stoppage at Boeing factories in Washington. We’re puzzled, given that these factors should have been priced into markets well in advance – and should be again, when next week’s data illustrates the impact of Hurricane Milton’s touchdown in Florida. Arguably, a clean read of underlying labour market conditions likely won’t become available until early December.

Fed officials seem generally unperturbed. According to Bloomberg, New York President John Williams yesterday said “Month to month, there’s wiggles and bumps in the data, but we’ve seen this pretty steady process of inflation moving” downward, and “I expect that that will continue”. Richmond’s Thomas Barkin said price pressures were “definitely headed in the right direction”, and Chicago’s Austan Goolsbee expressed confidence in the “overall trend”. 

But Atlanta’s Raphael Bostic sounds slightly more hawkish. In an interview with the Wall Street Journal, he said that he had pencilled in just one more rate cut this year, and said “I am totally comfortable with skipping a meeting if the data suggests that’s appropriate”. Traders now have 1.8 rate cuts priced in for this year, with a total of 5.8 forecast by the end of 2025. This essentially means that front-loading expectations have been discarded in favour of a more gradual easing trajectory, and brings the total number of moves down sharply from the 7.6 expected at the beginning of October.

The Canadian dollar is climbing after the economy added more jobs than expected in September, lowering the likelihood of an outsized rate cut at the Bank of Canada’s upcoming meeting. Numbers published by Statistics Canada show the country generating 46,200 new jobs in the month, well above expectations that had been set closer to the 27,000 mark. There is no evidence of an acceleration in the pace of layoffs, and the report’s internals look quite favourable – full-time roles jumped by 112,000 while part-time fell 65,300, and the private sector added a net 61,200 while the public sector shed 23,600. The labour force expanded less than anticipated – likely as a result of recent policy shifts – and the unemployment rate fell to 6.5 percent from 6.6 percent in August, narrowing a gap with the US measure that has historically helped determine long-run performance in the Canadian dollar.

Data out later this morning could further moderate expectations for the Bank of Canada’s next decision on October 23. The Bank’s third-quarter Business Outlook Survey and Survey of Consumer Expectations, landing at 10:30, will be closely parsed by market participants, with views on inflation and overall economic sentiment helping determine the extent to which policymakers feel motivated to pull the monetary fire alarm.

We think officials will continue to depress rates in quarter-point increments at coming meetings: given a lower starting point and an earlier kickoff to its easing cycle, Canada’s policy rate is much closer to neutral than in the US, and signs of improving economic sentiment are becoming more obvious to many market participants. But many others are expecting a more decisive move – including former Deputy Governor Paul Beaudry – and it’s not unreasonable to think that policymakers could seize on the opportunity opened up by last month’s outsized cut from the Federal Reserve to provide a similar boost to the Canadian economy.

A French effort to reduce fiscal imbalances is helping support the euro. Finance Minister Antoine Armand this morning presented a budget that would cut public spending by €41.3 billion over the next year, with tax increases generating another €19.3 billion. “Our country is in an unprecedented situation and at a pivotal moment,” he said, “The French economy is holding up, but our public debt is colossal. It would be both cynical and fatal not to see it, say it, and recognise it”. If passed in its entirety, the Finance Ministry expects the budget to bring the deficit down to 5 percent in 2025 from an forecast 6.1 percent this year – but with the minority government’s opponents on both the left and the right staunchly opposed to cuts in spending and entitlements, full implementation is far from a foregone conclusion. Relief in bond and currency markets could prove evanescent, at best.

The British pound is trading on a modestly stronger footing after the economy snapped out of a brief downturn in August. Gross domestic product increased 0.2 percent on a month-over-month basis in August, with the three biggest sectors in the economy – services, production, and construction – all posting gains. But with momentum clearly slowing – a trend especially visible in three-month moving averages – gains look fragile.

Oil prices are coming back under pressure as supply and demand concerns outweigh fears of a wider escalation in the conflict between Iran and Israel. Both of the major global benchmarks – Brent and West Texas Intermediate – jumped during yesterday’s session on reports suggesting that the Israeli security cabinet was meeting to discuss retaliatory strikes against Iran, but have since given back those gains in the face of steady selling pressure from bears expecting a continued loosening in market conditions.

With China’s finance ministry likely to deliver details on the government’s fiscal stimulus plans at tomorrow’s press conference, a renewed melt-up in onshore stock markets and commodity-linked currencies looks quite plausible at the Sunday open. Authorities are seen delivering at least 2 trillion yuan in new spending spread across a series of initiatives targeting household consumption and real estate markets, with a bigger-than-expected injection likely to add momentum to already-spectacular gains in financial markets. We are more sceptical of course, suspecting that officials ultimately intend to put a floor under property values, not trigger a renewed rush of speculative activity – but in a state-led economy like China’s, it remains difficult, if not impossible, to assess how policy outcomes will emerge, and surprises are always possible.