Global equities, commodities, and risk-sensitive currencies are rallying this morning as rumours of an easing in China’s “covid-zero” policy spread across social media – but gains look vulnerable as official sources strenuously deny any changes are afoot. The DXY dollar index is down almost 0.6 percent and the yen – strongly correlated with the S&P 500 – is up sharply as North American traders hit their desks, suggesting that markets are setting up for a Santa Claus rally even as the outcome of tomorrow’s Federal Reserve decision remains uncertain. The 10-year Treasury yield has slipped well below the 4 percent threshold, and bond markets elsewhere are posting solid gains.

Australia’s central bank lifted rates by another quarter percentage point last night. Policymakers said they now expect annual inflation to peak at 8 percent this year, and growth to slow to just 1.5 percent in 2023 and 2024 as higher rates take their toll on the country’s extraordinarily-indebted – and variable mortgage-dependent – household sector. The Australian dollar slipped slightly after the decision.

The euro is trading on a slightly firmer footing after European Central Bank president Christine Lagarde said “Inflation is still too high throughout the eurozone. The longer inflation remains at this high level, the greater the risk that it will spread throughout the economy. Then consumers and businesses will also begin to expect higher inflation in the future, and this is dangerous”. In an interview with a Latvian paper, she warned that rates were far from neutral levels – particularly in light of yesterday’s surprisingly-strong 10.7-percent inflation print – saying, “The destination is clear, and we haven’t reached it yet”.

The Institute for Supply Management’s manufacturing index is expected to drop toward 50 in October from September’s 50.9, putting the sector on the brink of contraction.

Vacancies are thought to have fallen in September as firms paused hiring plans, with the number of open positions shown in this morning’s Job Openings and Labor Turnover survey expected to fall to 9.8 million in September from 10.1 million a month earlier.

Tomorrow’s Fed decision continues to drive short-term positioning. Market participants are overwhelmingly convinced the central bank will opt to raise the benchmark federal funds rate by three-quarters of a percentage point for a fourth consecutive time, and many are placing trades designed to generate gains in the event of a dovish shift in communications. Some officials have recently expressed support for “stepping down” the pace of rate hikes in December, and talk of downside risks has grown louder. But there are reasons to remain cautious – financial conditions in the US economy remain remarkably loose, and policymakers are unlikely to welcome a renewed bout of credit creation.

Karl Schamotta, Chief Market Strategist