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Market Briefing: Hopes for Policy Pivot Fade, Dollar Rebounds

Hopes for a dovish pivot from the Federal Reserve and other major central banks are getting snuffed out in markets, forcing a broad-based unwind in risk-sensitive asset classes. Treasury yields are climbing, equity futures are setting up for a weaker session after the biggest two-day gain in more than two years, commodity prices are down, and the dollar is back in fine form, clobbering its major rivals as it moves higher. The euro, pound, yen, and yuan are all sliding as as traders cut risk heading into this Friday’s non-farm payrolls report and next week’s inflation data.

We remain convinced the Federal Reserve will slow the pace of rate hikes later this year and pause in early 2023, leaving rates unchanged for a prolonged period of time, but a true “pivot”—in which rates are cut—seems much less likely after a number of policymakers directly invoked the lessons of the nineteen-seventies in statements over the last few months.

Data released yesterday showed the number of jobs available fell dramatically in August, down 10 percent from July, in the biggest monthly drop since the pandemic. The latest job openings and labor turnover survey helped reinforce expectations of a cooling in US labour markets, but overall conditions remain extremely tight, with 10.1 million open jobs set against 6 million unemployed people.

Falling job openings are unlikely to sway policymakers. In comments two weeks ago, Fed chair Jerome Powell said “Job openings could come down significantly—and they need to—without as much of a an increase in unemployment as has happened in earlier historical episodes.”

The OPEC+ group of oil exporting countries is set to decide on a production cut at this morning’s meeting. Major news organizations are suggesting output could be reduced by 1 – 2 million barrels a day as cartel members seek to support prices near current levels against a weaker global demand backdrop. Markets appear well-prepared – both global oil benchmarks have risen this week, with no evidence of disruptive price action.

The ADP private sector employment report is expected to show 200,000 jobs added in September. Market participants are unlikely to react strongly to a surprise – the report was revamped last month, and there are major unknowns around its predictive power ahead of Friday’s official non-farm payrolls number.

Trade balance numbers for August should show the deficit narrowing slightly as commodity prices slump and consumer spending patterns continue to shift.

The Institute for Supply Management’s services index is considered likely to fall slightly in September, dropping to 56 from 56.9 percent in August.

Atlanta Fed President Bostic is likely to reiterate previous hawkish comments when he speaks on inflation this afternoon, suggesting that policy rates need to rise further into restrictive territory—between 4.25 and 4.5 percent—by year end.

Karl Schamotta, Chief Market Strategist

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