The dollar is softer, Treasury yields are slumping, and implied volatility levels are creeping higher as an action-packed week begins in financial markets. Equity futures are pointing to a slightly stronger open after Friday’s selloff, and risk-sensitive currencies are edging upward.

The pound is slightly stronger after the Office for National Statistics said the economy grew by 0.5 percent in October after shrinking 0.6 percent in September. This beat consensus forecasts for a 0.4-percent expansion, and helped show that a surge in the “moron risk premium” (to borrow Dario Perkin’s term) during the Truss government’s brief time in power has had little impact on the underlying economy.

The offshore Chinese yuan is weakening as investors grow more cautious on the economic outlook. With the government rolling its “zero-covid” policies back more aggressively than most observers had expected, anecdotal evidence is trickling out to suggest that infections are soaring, overloading the medical system, driving fearful citizens back to their homes, and threatening to unleash a new round of crackdowns.

There are no major data releases on the agenda for today’s North American session.

Tomorrow’s inflation report could be the week’s most important event, with the potential to set direction across global financial markets well into the new year. Economists think headline consumer prices will rise 7.3 percent year-over-year and 0.3 percent month-over-month, down from 7.7 percent and 0.4 percent in the prior month as slower increases in food and energy costs offset still-rising services prices. A faster-than-expected print – entirely possible given upside surprises in a number of other inflation indicators in recent weeks – could derail any comforting assumptions about how high rates will climb, and how long they will remain there. On the other hand, a substantially-softer number could add fuel to a nascent Santa Claus rally in markets, triggering a short-squeeze across a number of asset classes.

Markets are overwhelmingly positioned for a 50 basis-point move at Wednesday’s Fed meeting. Updated projections should show the terminal rate approaching 5 percent next year, with growth and employment forecasts revised in a negative direction. Chair Powell is expected to push back against easier financial conditions during the accompanying press conference, but there’s considerable uncertainty around just how hawkish he will sound.

The European Central Bank and Bank of England are each set to deliver 50 basis-point hikes on Thursday, with markets looking for relatively-hawkish forward guidance from a region still struggling to tame high energy prices. Somewhat remarkably, implied market pricing currently suggests that Madame Lagarde and her colleagues might continue to raise rates even after the Fed begins cutting late next year. We doubt this is a sustainable view.

Karl Schamotta, Chief Market Strategist