Major asset classes are moving sideways and implied volatility in the currency markets is falling after a record of the Federal Reserve’s July meeting largely confirmed prevailing investor views.

Oil and commodity prices are climbing after Chinese authorities signalled an acceleration in stimulus efforts. Bloomberg quoted state media sources as saying local governments had been authorized to sell an additional $226 billion in bonds, helping to support spending and avoid a “fiscal cliff”. President Xi Jinping said authorities would try to balance growth with disease-control policies, continuing the process of opening the economy up. The expressions of support come on the heels of a raft of data showing the world’s second largest economy entering a sharp slowdown in recent months – and after coronavirus infections spiked, threatening further lockdowns.

We’re not sure the market reaction is well-justified – China’s problems are deeply entrenched in the country’s growth model, and are unlikely to be resolved through a papering-over exercise.

The Canadian dollar is up, mirroring moves in West Texas Intermediate. Monetary policy expectations are holding stable after Tuesday’s data showed signs core price pressures were becoming more entrenched, and after Bank of Canada Governor Tiff Macklem published an opinion piece laying out the case for higher rates. Traders expect a 75 basis point hike in September, with a sharp deceleration coming in the months thereafter as global conditions worsen and incredibly-indebted households cut spending. The loonie’s gains could be capped around the 1.27 mark in the absence of a big drop in the US dollar.

Yesterday’s better-than-expected core retail sales data demonstrated continued American exceptionalism. With Japan stuck in the doldrums, China slowing, and Europe heading into a recession, heroic levels of spending by US consumers are helping to keep the global economy humming – and are providing the foundation for the dollar’s strength. Few would consider this sustainable, but a recession or big rise in unemployment look unlikely for now.

July’s Fed minutes helped alleviate market uncertainty surrounding Jerome Powell’s post-meeting commentary. Takeaways were clear: officials are preparing to slow the pace of tightening, but need time to understand how policy changes are impacting the economy, and intend to keep rates in restrictive territory until inflation is conclusively defeated.

But financial conditions have likely loosened more than desired. Markets have rallied and lending conditions – including mortgage rates – have eased materially since the meeting, threatening to undo some of the central bank’s hard work. At next week’s Jackson Hole conference, we think Mr. Powell will ratify short-term market expectations while pouring cold water on the idea of a “pivot” that would bring rate cuts in early 2023. Investors currently expect the Fed Funds rate to peak at around 3.75 percent in this cycle before subsiding to 3.25 percent by the end of 2023.

A light day of data beckons. Jobless claims are seen falling to 260,000 last week from 262,000 in the week prior. Existing home sales will almost certainly slump, with markets anticipating an annualized 4.8 million in July, down from 5.12 million a month earlier. The Conference Board’s leading economic index for July is expected to drop 0.5 percent. And Fed speakers — Esther George and Neel Kashkari — are likely to continue making hawkish noises, pointing to strong economic data as evidence the central bank can continue tightening policy without tipping the economy into recession.

Tomorrow’s Canadian retail sales data could prove confusing for loonie bears. A jump in gas station receipts will help offset a drop in car purchases, lifting the headline print in June, while the core measure is likely to exhibit continued strength. The statistical agency’s advance estimate for July will almost certainly drop, with falling gasoline prices obscuring deeper fundamental shifts in consumer spending. A slowdown is coming, but evidence could take months to arrive.

Karl Schamotta, Chief Market Strategist