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Investors are in a “sell first, ask questions later” kind of mood. Bond and equity markets suffered their worst day of the year yesterday amid speculation we have arrived at a “good as it gets” moment for the US economy, and risk aversion remains well entrenched – the dollar and yen are outperforming their rivals on safe-haven demand, commodity prices are down, and yields are up sharply.

Consumer bellwethers Home Depot and Walmart issued disappointing outlooks, suggesting that prices could continue to increase even as sales volumes fall through the remainder of the year. Home Depot projected flat revenues for 2023, warning that spending on services was beginning to cannibalize receipts in the goods sector, and that renovation activity would slow further as elevated borrowing costs weigh on housing markets. Walmart said spending on non-essential categories like toys and electronics was falling as consumers prioritized basic necessities like food.

A raft of monthly purchasing manager surveys from S&P Global showed household and business confidence levels rebounding in every major economy, suggesting that central bankers will need to raise rates more aggressively as they try to cool aggregate demand. Yields rose in the European Union and United Kingdom, and expectations for the world’s most important central bank climbed even higher. Traders now think the Fed Funds benchmark will top out around 5.35 percent this year, with a pivot looking less likely before 2024 – marking a stark contrast with a few weeks ago, when many expected rates to hit 5 percent before falling by year end.

This afternoon’s minutes could provide insight into how the Fed’s reaction function was evolving in early February, but are likely to reflect a more confident view of the “disinflationary process” than is now tenable. At the time, data releases were pointing to a gradual deceleration in consumer spending, coupled with a broad cooling in inflation pressures, but evidence in the intervening weeks suggests that strong job markets, elevated income gains, and sticky price dynamics could force policymakers onto a more hawkish footing. We suspect the minutes could paint an artificially-dovish picture of the debate and generate a short-lived relief rally in markets. The next Statement of Economic Projections, due for release at the conclusion of the March 22-23 meeting, could prove more meaningful – and almost certainly poses a bigger threat to asset pricing.

Today’s calendar is otherwise quiet, with the New York Fed’s John Williams scheduled to speak on inflation this evening.

The Canadian dollar continues to trade north of the psychologically-important 1.35 mark. Yesterday’s evidence of weakening price pressures helped stabilize expectations for another rate increase in coming months, but domestic data releases are proving almost irrelevant in driving currency market dynamics. Instead, traders and investors appear laser focused on shifts in US financial conditions: when rates drop and credit conditions ease, the Canadian dollar tends to outperform in line with US equity markets, but when conditions tighten, the exchange rate takes it hard. We think markets have become acutely aware of interest rate sensitivities in the spectacularly-overleveraged Canadian economy, leading to a situation in which the loonie behaves (somewhat) like an emerging market currency.

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