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Markets are eking out a modest recovery after a three-day paroxysm of selling that saw traditional safe haven currencies gain against their risk-sensitive rivals. North American equity futures are inching toward a positive open, Treasury yields are flat, and the dollar is stable. The pound and euro are trapped in listless trading ranges, with no obvious catalysts for movement on the calendar.

Recession fears appear to be overtaking monetary tightening expectations in driving market behaviour once again, but yesterday’s newsflow remained broadly supportive of higher rates. Weekly unemployment claims unexpectedly fell, dropping by 15,000 to 190,000, homebuilding activity fell, but remained relatively strong, and the Federal Reserve’s Lael Brainard and John Williams both suggested that policy settings would need to become more restrictive in coming months. Markets currently think the Fed will deliver a quarter-point hike in February, with at least one more move coming before policymakers pause and begin cutting rates near the end of the year.

Japanese core inflation broke the 4-percent threshold for the first time in four decades in December, but Bank of Japan Governor Haruhiko Kuroda pinned the move on unsustainable increases in import prices. Consumer prices excluding fresh food rose 4 percent from a year earlier in December, the fastest pace since December 1981, while a measure excluding both food and energy prices—closer to the “core” definition used in most other industrialized countries—climbed just 3 percent. In comments at the World Economic Forum in Davos, Mr. Kuroda said inflation would likely begin to slow next month as falling energy prices flow through, saying “Our hope is that wages start to rise and that could allow the 2 percent inflation target to be met in a stable and sustainable manner… but we have to wait for some time.”

In other news, Japan’s trade deficit shrank in December as global energy prices fell and exports stabilized. The yen fell, and accelerated its decline during Kuroda’s comments as traders began to question whether another change in the yield curve control framework would happen before his departure in April. From our perspective, we think developments in the yen will stop making headlines in coming weeks as expectations for near-term Bank of Japan policy shifts move back into neutral.

Statistics Canada is expected to report retail sales fell -0.6 percent in November, but markets will focus on the preliminary estimate for December. Canadian consumers have defied expectations—and, frankly, basic standards of prudence—in recent months, with spending in both auto and tangible goods categories remaining relatively robust even rates rise and the economic backdrop darkens.

Odds on a 25 basis-point move from the Bank of Canada at next week’s meeting are likely to remain largely unchanged. Tiff Macklem and his colleagues are widely expected to deliver what could become the last rate hike in this tightening cycle. Language in the accompanying statement and monetary policy report will walk a fine line between acknowledging sticky core inflation pressures and hotter-than-expected conditions in the country’s labour market, while acknowledging signs of an incoming slowdown exposed in the latest survey data.

US existing home sales might slip again in December, falling to an annualized 3.95 million from 4.09 million a month earlier. Housing market activity has slowed with rising interest rates, but signs of stability have emerged in recent data releases, suggesting that underlying demand remains relatively robust.

Federal Reserve speakers today include Philadelphia’s Patrick Harker, Kansas’ Esther George, and Governor Christopher Waller at 1 pm. Waller is considered one of the central bank’s intellectual leaders, having previously served as a director of research for the St. Louis Fed, and being one of the first to signal discomfort with loose-money policies in 2021.

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Higher for (even) longer