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Market Briefing: Fed Deceleration Hopes Lift Currency Markets

The dollar is trading near a one-month low as the Federal Reserve’s tightening cycle inflicts damage on the real economy, bolstering the case for a slower pace of rate hikes in the months ahead.

The US 10-year yield fell below 4 percent and markets jumped yesterday after the Bank of Canada decided to raise rates by less than expected. The Canadian dollar tumbled in the seconds after the surprise decision, but immediately rebounded as the greenback slumped.

But Canada is great at exporting comedians – people like John Candy, Jim Carrey, Seth Rogen, Elon Musk – not its monetary policy settings. Clear structural differences between the two economies make it unlikely the Bank of Canada’s decision will influence the Federal Reserve‘s calculus – Canadians are much more reliant on the housing market for jobs and wealth generation, are more exposed to regular rate resets, and are carrying far more debt as a share of income.

The European Central Bank is almost certain to raise rates by 75 basis points in a few minutes, after a long communications campaign and extensive pre-decision signalling helped firm market expectations. Policymakers are expected to slow the pace of hikes in the coming months as inflation pressures abate, but the gap between US and EU policy rates is seen closing slightly between now and mid-2023.

In brighter news, European natural gas prices are now down more than 70 percent from mid-summer highs as storage facilities fill up and global supply networks are re-routed. Markets are growing less fearful of a catastrophic rise in prices this winter, and more optimistic on the outlook for the broader economy. The euro is inching its way above parity as we go to pixels.

Investors think US gross domestic product expanded at a 2.3-percent annualized pace in the third quarter. The latest numbers, out at 8:30, should dampen talk of an ongoing recession, but slower investment, weakening consumer spending, and plunging imports will plant big warning flags for the months ahead.

Durable goods orders are seen rising 0.7 percent in September from the prior month as capital equipment spending rebounded and lifted the transportation category. With transportation excluded, spending likely weakened as consumers shifted gas-price savings into the services sector.

Jobless claims probably crept slightly higher in the week ended October 22, but should remain well below levels that would indicate softening in the labour market.

Tomorrow’s September personal consumption expenditures print looms as the next big market catalyst. Both headline and core inflation numbers are seen rebounding slightly from August, but surprises – to the upside or downside – could shift odds on a 75 basis point hike at the Fed’s December meeting.

Karl Schamotta, Chief Market Strategist

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Higher for (even) longer