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Market Briefing: Markets Tiptoe Into October

With traders and investors suffering from a kind of post-traumatic stress syndrome after a brutal September, markets are cautiously edging higher this morning. North American equity indices are pointing to a stronger open, commodity benchmarks are finding their feet, and economically-sensitive currencies like the Canadian dollar are climbing back from Friday’s selloff.

The dollar is slightly softer, but remains strong after the Federal Reserve’s favoured inflation measure showed no evidence of deceleration. According to data released on Friday, the core personal consumption expenditures deflator climbed 0.6 percent in August, suggesting that underlying price pressures continue to grow even as gasoline costs tumble – justifying continued tightening from the world’s most powerful central bank.

Both global oil benchmarks climbed over the weekend as rumours swirled around this week’s OPEC+ meeting. West Texas Intermediate is trading near $83 per barrel, and Brent is going for $88, up almost 4 percent from Friday’s close on expectations for a 1.5-million barrel reduction in production quotas. The action is believed likely to support prices near historically-high levels, but won’t fundamentally alter demand and supply imbalances in the short run. Many members of the cartel are struggling with capacity problems and have missed output targets for months, meaning that a pro-rata cut could see volumes drop by less than 500,000 barrels a day.

UK chancellor Kwasi Kwarteng abandoned plans to cut taxes on the country’s wealthiest citizens, bowing to pressure from financial markets and fellow Tory party members. The reversal came after Prime Minister Liz Truss, in a series of television interviews, appeared to simultaneously support the policy and blame her chancellor for delivering it. With odds on an emergency rate hike from the Bank of England falling, gilt yields are slipping and the exchange rate is moving higher – but the pound remains vulnerable as the government’s approach to setting economic policy bears more than a passing resemblance to an episode of “In the Thick of It”.

Brazil’s presidential election is set to go into a second round after current president Jair Bolsonaro secured 43 percent of the vote against former president Lula da Silva’s 47 percent. The real is set to rise this morning as both candidates are expected to tack toward the centre in campaigning ahead of the October 30 runoff vote – but considerable uncertainty remains around whether Bolsonaro will accept the outcome, should he lose.

Today’s US data calendar is light: The Institute for Supply Management’s manufacturing index is expected to slide to 52 in September from August’s 52.8, and construction spending is seen slumping 0.2 percent from the prior month. Federal Reserve officials Bostic and Williams are scheduled to speak, but neither is likely to move markets.

Friday’s non-farm payrolls report looms as the biggest potential volatility catalyst in the week ahead. Markets think 250,000 positions were added in the month of September, with the unemployment rate holding steady near 3.7 percent. The labour market is losing momentum, but remains incredibly strong, motivating the Federal Reserve to tighten policy while helping to shelter the economy against higher rates.

Karl Schamotta, Chief Market Strategist

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