Easing expectations are growing across global financial markets after another round of softer-than-anticipated data led investors to pull implied rate cuts further forward in 2024.
In the US, equity futures are firm, Treasury yields are down, and the dollar is on the defensive after reports yesterday morning showed import prices sliding by more than economists forecast while the number of people submitting new claims for jobless benefits began to climb in earnest. Walmart, arguably a better consumer spending bellwether than any sentiment survey or economic forecaster, released a more pessimistic earnings outlook, saying it saw signs of restraint from households in late October, portending further weakness during peak buying season ahead. Chief Executive Officer Doug McMillon warned “We may be managing through a period of deflation in the months to come”.
Gilt yields are down sharply and the pound is selling off after a weak retail sales report provided more evidence of the toll taken on the real economy by the Bank of England’s tightening efforts. Sales receipts dropped 0.3 percent in October according to the Office for National Statistics following a downwardly-revised 1.1 percent decline in the prior month, surprising economists who had expected a 0.4-percent gain ahead of the critical holiday season. Markets think Andrew Bailey will begin cutting rates by June at the latest, with bets on an earlier move rising with each soft data release.
Similarly, the European Central Bank is now expected to cut rates by a full percentage point in 2024, nearly matching the Fed’s pace of accommodation as the economy slows and price growth subsides. In a speech this morning, Governing Council member Francois Villeroy de Galhau said inflation had clearly decelerated after hitting a peak earlier this year, justifying a halt in the pace of rate increases. Only a few months ago, European policymakers were expected to keep hiking after the Fed reached its terminal rate – and were seen maintaining policy settings for a prolonged period even as US rates began falling.
And the Japanese yen looks set to end the week with the strongest performance among the majors, rising on a narrowing in rate differentials against the US. Expectations for a policy shift from the Bank of Japan continue to subside: Governor Ueda has remained steadfastly dovish for months and yesterday appeared unworried about currency depreciation, telling Parliament “It’s hard to definitely say that a current weak yen is negative for the economy”. But with US yields coming under pressure, carry trade flows are shrinking and the case for shorting the yen has become less persuasive.
Today’s economic data cupboard is largely bare, with the US reporting housing starts and Canada delivering an update on industrial product prices – third tier releases which rarely move markets. Instead, investors will listen for more guidance from Fed officials, with Boston’s Collins, Governor Barr, San Francisco’s Daly, and Chicago’s Goolsbee all scheduled to make appearances through the session. If recent efforts are any indication, all of them will caution against reading too much into the recent spate of soft data, echoing Jerome Powell in warning against “head fakes” on the path toward lower inflation.
Here in Canada, we’re borrrrred. The Canadian dollar, driven less by domestic fundamentals than by changes in global markets, remains pinned into an unusually-tight trading range. On one side, loosening financial conditions – driven by falling US yields – are helping to relieve pressure on the country’s deeply overleveraged private sector and provide some lift. But on the other, falling crude prices and the growing likelihood of a drop in demand in the country’s biggest export market – the United States – are constraining the currency’s gains. We think the balance of risks in the short term argues toward additional incremental loonie appreciation, but remain aware of the deep vulnerabilities embedded in the Canadian economy, and expect the calm to break to the downside in the early new year.