Markets are in risk-off mode this morning as protests against China’s “zero-covid” policies boil over and raise uncertainty in the world’s second-largest economy. Treasury yields are slumping as investors seek safety and speculators unwind leveraged positions, and the dollar is trading on a slightly weaker footing.
The bravery of people confronting a regime with unsurpassed control over its citizens has been inspiring and astonishing, but Beijing’s long history of stamping out dissent would suggest that the current bout of unrest will be short-lived, with limited implications for the broader global economy. Xi Jinping is unlikely to hand protestors a symbolic victory by responding with a significant loosening in restrictions in the short term – meaning that a big rebound in activity levels and demand for raw materials is looking less probable than in recent weeks – but China’s focus on supply-side stimulus throughout the pandemic has meant the country has generally subtracted from global demand on a net basis, with consumer spending remaining extraordinarily weak in real terms. Currencies like the Australian and New Zealand dollars are on the front lines this morning, but most major currencies are more closely tied to shifting growth expectations in the US economy, not China – suggesting that a mean reversion trade could unfold in coming days.
Crude prices are in retreat, with a China-related drop in demand expectations intersecting with debate around the potential impact of an EU-G7 price cap to drive benchmarks lower. West Texas Intermediate and Brent dropped more than 3 percent over the weekend, and momentum looks likely to carry them lower – but with the OPEC+ group of exporting countries set to meet next week, a swift reversal on speculation of production cuts cannot be ruled out.
Oil prices are lower ahead of an expected decision from the European Union and the Group of Seven industrialized nations to implement a cap on Russian oil prices. Under the plan, insurance, financing, and transportation services would be prohibited for shipments that are sold for more than the allowable limit – a move that is designed to impose a cost on Russia, while ensuring that world markets remain well supplied. The jury is out on whether this will have any effect on President Putin’s behaviour. We suspect not.
Economists expect tomorrow’s data to show another deceleration in the Canadian economy, with tightening lending conditions and deteriorating sentiment bringing annualized growth down to 1.5 percent in the third quarter. Gross domestic product may have expanded by less 0.1 percent in September as household consumption slowed, businesses cut investment, and activity in the real estate sector hit a brick wall. Exports probably provided some lift, but inventory drawdowns will limit any gains.
Markets are positioned for another 25 basis points in tightening from the Bank of Canada in December, but have grown distinctly more skeptical about 2023 – currency traders are betting that the economy will prove unable to shoulder even higher rates, forcing the central bank to proceed more cautiously than the Federal Reserve. Interest differentials remain firmly tilted against the loonie, and the currency has failed to make much headway against a broader weakening in the greenback.
Fed speakers today include St. Louis über-hawk James Bullard and New York’s John Williams.
The latest Job Openings and Labor Turnover Survey will land on Wednesday, bringing more evidence of a modest cooling in an incredibly-hot employment market. The ratio of unemployed workers to job openings probably fell slightly in October as levels of economic uncertainty increased, but will remain far below historical averages as labour shortages persist.
Jerome Powell will have a last opportunity to tweak market pricing ahead of the Fed’s December 13-14 meeting. In a speech at the Brookings Institution on Wednesday, the Chair is expected to acknowledge an imminent slowing in the pace of rate increases, while warning that tight labour market conditions will justify a more restrictive policy stance in 2023. In contrast with episodes earlier in the year, we don’t think there’s a lot of daylight between implied market expectations and the Fed’s desired path, suggesting that any adjustments should be minor in scale.
Fed officials go into purdah on Friday, leaving investors to their own devices – and columns from the Wall Street Journal’s Nick Timiraos – in the run-up to the meeting.
The central bank’s preferred inflation measure will hit on Thursday, with price pressures likely to remain stubbornly high in October. The month-over-month change in core personal consumption expenditures is expected to come in between 0.3 and 0.4 percent, with calculation differences meaning that the big downward adjustments in shelter and medical costs that characterized last month’s surprisingly-soft consumer price index won’t play a significant role.
On Friday, economists think the Bureau of Labor Statistics will report a slightly-softer pace of job creation in November, with the number of people added to non-farm payrolls slumping to 200,000 from 261,000 in the month prior. In the absence of a big upside surprise, market reaction should be relatively muted – investors have been girding themselves for a slowdown for months.
Karl Schamotta, Chief Market Strategist