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Fedspeak back in driver’s seat

Aaaaannd we’re back. Ten-year Treasuries are again yielding more than 4.63 percent and the dollar is up after the Minneapolis Federal Reserve’s Neel Kashkari warned rates might have further to climb in the months ahead. “Before we declare that we’re absolutely done, we’ve solved the problem, let’s get more data and see how the economy evolves,” he told Fox News yesterday, “We need to let the data keep coming to us to see if we really have got the inflation genie back in the bottle”.

As if to punctuate Kashkari’s point, the Reserve Bank of Australia last night set a worrisome example for other central banks by delivering a rate hike long after most observers had counted it out. Noting that inflation was subsiding more slowly than anticipated, policymakers lifted forecasts to show prices rising at a 3.5-percent year-over-year pace by the end of 2024, and increased the cash rate to 4.35 percent, giving short shrift to signs of weakness in the underlying economy. The post-meeting statement retained a strongly hawkish bias, warning “whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks”.

Barrels of West Texas Intermediate are going for less than $80 for the first time in two months as geopolitical risk premia evaporate and traders take a more skeptical view on Chinese demand growth. Updated trade data released last night showed the Asian giant importing 11.5 million barrels a day in October, up slightly from the prior month, but down almost a million barrels a day from the summer – a period during which consumption held up suspiciously well.

Weaker oil prices are adding to pressure on the Canadian dollar, which has backed off last week’s gains and is once again responding to a widening in rate differentials. After having effectively doubled from late-September levels, US two-year Treasuries are yielding 49 basis points more than their Canadian equivalents, while ten-years provide 83 basis points more – a difference which (arguably) highlights market views on the differing levels of sensitivity to higher borrowing costs on both sides of the border. After almost two decades spent largely ignoring the buildup in debt among Canada’s businesses and households, markets are now keenly aware of the collateral damage being inflicted by US rate increases.

Gilts rallied and the pound fell this morning after Bank of England Chief Economist Huw Pill suggested that British inflation saw a “sharp further fall” in October, bringing it into closer alignment with similar measures in other advanced economies and reducing the need for further monetary tightening. Traders are now pricing in at least three cuts in the main bank rate over the course of 2024, marking a violent reversal from levels seen earlier in the year, when the consensus thought the the Old Lady of Threadneedle Street would outpace her American cousin for a prolonged period.

The euro isn’t faring much better after German industrial output dropped for a fourth month in September, defying hopes for a bottoming-out in activity levels, and helping bolster the odds on a downturn in the common currency area.

In keeping with the remainder of the week, today’s data calendar is light: US and Canadian trade balance numbers will drop at 8:30, but haven’t had market-moving implications since foreign exchange traders last focused on fundamentals (sometime in the 1980’s, by our reckoning). Instead, with no fewer than six Fed officials speaking over the course of the session, including Chicago’s Goolsbee, Governor Barr, Kansas’ Schmid, Governor Waller, Vice Chair Williams, and Dallas’ Logan, shifts in policy expectations are likely to drive price action.

Still Ahead


Mexico’s central bank is likely to continue conveying its own version of the “higher for longer” message, holding its benchmark rate at 11.25 percent for a fifth consecutive meeting and warning markets to expect more of the same until well into 2024. Until the US slows in a meaningful way, we don’t see this changing: with inflation expectations remaining above target and the domestic economy performing well on growing remittances, exports, and investment, there’s little need to follow other emerging market central banks into a cutting cycle, and supportive yield differentials are helping sustain strong inward capital flows. (14:00 EDT)


The British economy may have entered the early stages of recession in the third quarter, with gross domestic product seen shrinking -0.1 percent after expanding 0.2 percent in the second. Further declines are likely in the new year as the consequences of the Bank of England’s tightening efforts hit home. (02:00 EDT)

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