Markets are roaring into the fourth quarter as investors downgrade expectations for rate hikes from developed-market central banks. US equity futures are set for a strong open after yesterday’s rally, yields are coming down, and risk-sensitive currencies are outperforming the dollar in the foreign exchange space.

Australia’s central bank surprised markets by lifting interest rates less than expected, saying “The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia”. Policymakers warned more rate hikes were likely still needed, but noted that consumer confidence and housing prices were suffering as “earlier large increases” hit the real economy. The Australian dollar fell and equity markets surged.

Australia’s action is having a “canary in a coal mine” effect on global rate expectations, coming after last week’s speech from Lael Brainard on monetary spillovers, and as academic luminaries like Greg Mankiw and Paul Krugman warn on the dangers of tightening policy too quickly. Two-year government bond yields in Canada, Europe, the United Kingdom and the US are all slumping as traders lower terminal rate expectations.

But Australia—like Canada—is a small, open, and spectacularly over-leveraged economy, meaning that interest rate sensitivities are far more profound. With the US household and corporate sectors carrying vastly-lower levels of debt, the Federal Reserve is unlikely to observe similar effects for many months to come. We wouldn’t rule out a renewed widening in rate differentials.

Oil prices are up for a second day as traders brace for an output cut exceeding a million barrels a day. The OPEC+ group of producing countries meets tomorrow, and is expected to trim supplies as members try to establish a global price floor around the $90 mark. Market inventories remain extremely tight, but a policy-induced slowdown across most major economies is expected to weaken demand in the year ahead – and in a perverse irony, the cartel’s actions could hasten any decline by keeping global inflation pressures elevated, necessitating more rate hikes from central banks.

Data from August is expected to show the number of jobs available in the the US remained almost twice as large as the number of people looking for work. The job openings and labor turnover survey, due at 10 am, is likely to show more than 11 million open positions against the roughly 6 million people who were unemployed at the time. The number of people quitting their jobs is seen holding near the seasonally-adjusted 4.2 million recorded in July, illustrating continued strength in the labour market and affording the Federal Reserve a degree of comfort as it tightens policy.

Economists think August factory orders, also out at 10 am, will look essentially unchanged from the prior month as demand growth weakens and the services sector captures a greater share of consumer spending.

Karl Schamotta, Chief Market Strategist