With protests losing steam and Chinese authorities making comforting noises about a relaxation in “zero-covid” policies, yesterday’s flight to safety is beginning to unwind. Treasury yields are softening and the dollar is down as investors tiptoe back into risk assets. Commodities are staging a solid rebound, the Canadian dollar is ticking higher, and the Antipodean units are recovering in a snappish manner.

Markets think China’s social unrest has made an immediate reversal in official policy less likely – authorities are loath to acknowledge signs of dissent – but will serve to accelerate the government’s vaccination efforts for the elderly population, enabling an earlier reopening.

The New York Federal Reserve’s John Williams delivered what – to our knowledge – might have been the first official acknowledgement that rates will begin falling once inflation has been brought under control. In comments to reporters after a speech at the Economic Club of New York, Mr. Williams stuck to the “slower for longer” party line that other officials have defined over the last two months, but said the central bank might have to loosen policy if price pressures subside. He said, “There’s a point at which you do need to bring interest rates down. It will depend on what’s happening with inflation”. This comes as markets have become increasingly convinced rates will be cut in late 2023.

The euro is holding gains achieved after European Central Bank President Christine Lagarde said inflation in the common currency area had not peaked, suggesting that policymakers could raise rates by more than currently expected. Investors don’t think European rates will exceed their US equivalents at any point in this cycle, but on current trajectories, the Fed is expected to downshift – and even begin reversing direction – sooner than the ECB.

Statistics Canada is expected to report a 1 percent annualized increase in gross domestic product for the third quarter, but yesterday’s surprisingly-large decline in the country’s current account balance has raised downside risks. Canada’s current account – which measures net trade, its net income on cross-border investments, and net transfer payments – briefly moved into surplus in the first half of the year as oil and commodity prices soared, but fell back into negative territory in the third quarter, posting an 11.1 billion-dollar deficit.

The Case-Shiller 20-city home price index is expected to show a 10.9 percent increase in the year to September, illustrating the extent to which slowing real estate markets haven’t unwound the wealth effects that are helping to buttress American consumption levels. The Conference Board’s consumer confidence index is on course to fall to 100 in November from 102.5 one month earlier. No other major releases are on the schedule for today.

Karl Schamotta, Chief Market Strategist