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Market Briefing: Markets Fade Ahead of Potentially-Sobering Fed Minutes

Investors are bracing for hawkish language when the Federal Reserve releases minutes from its recent policy meeting this afternoon. Equity futures are under pressure, ten-year Treasury yields are ticking higher, and the dollar is inching forward against most of its major rivals.

Inflation in the United Kingdom hit 10.1 percent in July, up from a year-over-year pace of 9.4 percent in June as surging food and energy prices cut living standards. Data released by the Office for National Statistics this morning showed the fastest increase in headline consumer prices in more than four decades, paired with a much hotter-than-expected rise in the core

Cable rose modestly as traders bet the Bank of England would approve another 50 basis point rate increase in September – but gains were capped by growing recession risks. With inflation running at more than five times the central bank’s target and likely to go higher still, policymakers are expected to continue front-loading the monetary tightening cycle, pushing overnight rates above 3.75 percent by early in the new year. This is widely believed likely to push the economy further into contraction, and the yield curve is deeply inverted, with the gap between two- and ten-year gilts exceeding levels last seen during the global financial crisis in 2008.

The Canadian dollar is struggling to gain traction even after yesterday’s inflation release lifted odds on another jumbo-sized rate hike in September. An average of core consumer indices rose by more than markets expected in July, confirming that a widening in price pressures is occurring even as headline inflation moves past its peak. In an opinion piece published by the National Post, Bank of Canada Governor Tiff Macklem ratified market expectations for a 75-basis point move in September, saying inflation “remains far too high,” while suggesting that the central bank’s “job is not done yet”. We remain convinced the Canadian economy is headed into a painful and protracted balance sheet-driven slowdown, and — judging by action in the currency markets — we’re not alone.

US retail sales are expected to show a 0.1 percent increase. Markets think spending grew more slowly in July relative to the prior month, but the signal could be difficult to discern in the headline-level noise – falling gasoline prices and a shift in spending away from durable goods were likely partially offset by gains in other household product lines. Yesterday’s better-than-expected earnings and guidance from consumer bellwethers Home Depot and Walmart would suggest that the American consumer remains alive and well.

Investors will be glued to their terminals at 2 pm today when the world’s most powerful central bank releases a record of its July meeting. As with all Fed minutes, market reaction may be non-existent, but there are reasons to suspect the release could lift yields across the curve. To some, Chair Jerome Powell executed a “pivot” in the post-meeting press conference when he hinted that monetary tightening might slow in the months ahead. The minutes could deliver a more nuanced understanding of the thinking behind his comments – perhaps even confirming whether such a pivot actually occurred. Investors are currently assigning coin-toss odds to a 75 basis point move in September (with a 50 basis point hike considered just as likely), and are also betting rate cuts will begin in mid-2023. Both assumptions are vulnerable to change.

Karl Schamotta, Chief Market Strategist

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Twists & turns

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