Yesterday’s Federal Reserve decision was seen as tilting dovish, with a newfound emphasis on “tighter financial conditions” taken to mean that higher bond yields are negating the need for further rate hikes. Ten-year government bond yields fell below 4.75 percent for the first time since mid-October, extending a move that began earlier in the session when the Treasury Department said it would ramp up issuance more slowly, and accelerated after the Institute for Supply Management’s manufacturing index tumbled more than expected. Equities gained, and the dollar fell against all of its major counterparts.

This was to be expected: several officials, most prominently Dallas’ Lorie Logan, had previously signalled discomfort with the pace and scale of increases in long term yields, suggesting that markets were doing the central bank’s work for it. After moving too far, too fast in the preceding weeks, yields were looking stretched, and positioning in the dollar had moved to extremes.

But the move could prove difficult to sustain in the short term. The Treasury’s funding needs are still massive, and price-insensitive official buyers remain largely sidelined. Although the manufacturing sector traditionally served as a reasonably accurate bellwether for the broader economy, it has not for several years, and October’s data was likely distorted by strike activity. And on close examination, Chair Powell’s comments were hardly representative of a true communications “pivot” – he warned rates could still move higher, saying that officials were asking themselves “Should we hike more?”, and repeatedly stated that he wasn’t expecting cuts next year.

If tomorrow’s non-farm payrolls report surprises to the upside, we can’t rule out a tactical reversal in the dollar, yields, and broader financial conditions. The Canadian dollar – particularly vulnerable to changes in all three factors – might find itself back on the firing line all too quickly.

The Bank of England is expected to leave its benchmark rate at a 15-year high in a few minutes, but the accompanying forecasts and vote split could be more important in determining short-term direction for currency markets. If officials have been reading the same tea leaves as us, an imminent recession has likely become the Monetary Policy Committee’s base case, with some beginning to consider easing policy early in the new year. The pound, which has lagged other majors in capitalizing on the dollar’s weakness, could see sharp positioning-related adjustments as the decision hits.

The Japanese yen is still clinging to the 150 handle against the dollar, with the central bank’s lacklustre tightening hints, the Ministry of Finance’s jawboning efforts, and the government’s fiscal spending plans interacting to leave the exchange rate largely unmoved. Earlier in the week, a relatively mild tweak to the Bank of Japan’s yield curve control framework failed to impress market participants, forcing vice minister of finance Masato Kanda to warn authorities were on intervention “standby”. And last night, Prime Minister Fumio Kishida passed a 17-trillion yen stimulus bill aimed at offsetting the impact of higher living costs on households, saying “We haven’t achieved a virtuous cycle of growth yet. The biggest problem we have is that wages haven’t caught up with inflation”.

We’re reminded of the old Simpsons episode in which Mr. Burns goes to the doctor:

Doctor: “Mr. Burns, I’m afraid you are the sickest man in the United States. You have everything.”

…

Mr. Burns: “This sounds like bad news.”

Doctor: “Well, you’d think so, but – all of your diseases are in perfect balance.”

…

Mr. Burns: “So, what you’re saying is… I’m indestructible!”

Doctor: “Oh, no, no. In fact, even a slight breeze could…”

Mr. Burns: (leaving the office, mumbling to himself) “Indestructible!”

 
Still Ahead

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)