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Market Briefing: Markets Trapped In Doldrums Ahead of Fed

Currency market trading ranges have gone flat ahead of tomorrow’s Federal Reserve decision, but the dollar remains well-bid in a global environment dominated by tightening financial conditions. Equity futures are slumping after the US 10-year hit its highest levels in more than a decade earlier this morning, briefly climbing above 3.545 percent.

The world’s most powerful central bank is expected to deliver a 75 basis point hike. Markets are assigning less-than-20-percent odds to a 100 basis point increase, especially after the Wall Street Journal’s Nick Timiraos yesterday published an article giving short shrift to a larger move. Mr. Timiraos helped prepare the ground for the Fed’s bigger-than-expected hike in July.

But the “dot plot” could prove more important, with updated estimates for growth, employment, and inflation playing a key role in setting investor expectations for 2023. If policymakers expect to raise the Federal Funds rate above 4 percent and leave it there — even as the economy slows — inflation expectations should subside. If instead median forecasts prove incongruent — with growth remaining stable even as monetary policy turns more restrictive — the central bank could face credibility problems, triggering more volatility in the months ahead.

The euro is trying to climb beyond parity, but keeps slipping. Overnight trading saw the common currency climb roughly 50 basis points against the dollar as Dutch front-month gas – the European benchmark – fell another 6 percent – but those losses soon reversed, and gravity reasserted itself once again.

Japanese inflation climbed slightly more than expected, with core prices excluding fresh food rising 2.8 percent in the year to August, beating forecasts set closer to 2.7 percent. This pales in comparison with the pressures seen in other economies – with both food and energy prices excluded, prices increased just 1.6 percent – meaning the Bank of Japan is likely to maintain its negative policy rate and zero-percent yield target on 10-year government bonds when it meets later in the week.

Housing starts — a gauge of activity in the US real estate sector — are expected to inch slightly higher in August, with economists looking for 1.45 million, up from 1.446 million.

Canadian headline inflation likely fell in August, but stubbornly-high core prices won’t give central bankers any respite. Statistics Canada is expected to report a 7.3 percent year-over-year rise in its all-items index, down from the 7.6 percent pace recorded in July. An average of the three core measures tracked by the Bank of Canada probably firmed around 5.4 percent, up from 5.3 in the prior month. Markets think the central bank will lift rates by another full percentage point by early next year, before pivoting in the face of an economic slowdown.

Karl Schamotta, Chief Market Strategist

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