Hopes for a soft landing in the US economy are slowly fading, but strong corporate earnings are keeping asset prices elevated for now. North American equity futures are pointing to a modestly stronger open after a series of better-than-expected earnings releases, and the trade-weighted greenback is up slightly as flows into US markets offset concerns about the longer-term outlook. We’re reminded of the old joke about the optimist who jumped off the Empire State Building – as he was falling, someone asked, “How’s it going?”, and he responded:“So far, so good!”
Yields on both sides of the 49th Parallel remain depressed after the Bank of Canada became the first major central bank to halt its rate hiking cycle, reinforcing expectations of a pause from the Federal Reserve within months. Two- and ten-year Treasuries softened in sympathy with their Canadian counterparts when Tiff Macklem and his colleagues explicitly signalled a pause in yesterday’s decision. For many market participants, an earlier end to tightening is seen as bringing rate cuts closer. The Canadian dollar itself was largely unchanged, and thus far this year remains an under-performer against the dollar among its G7–and commodity-linked—counterparts.
After hawkish comments from a number of officials, traders think the European Central Bank will stay on its hawkish trajectory for longer. The common currency broke through the 1.09 threshold against the dollar yesterday, and appears to be consolidating ground for a run through resistance near the 1.0930 mark. A disappointment in today’s US growth numbers could easily provide the catalyst, but we remain wary on longer-term gains – current market positioning on the bullish euro side looks overly crowded, raising the risk of nasty unwind if things don’t go according to plan over the next week.
Consensus estimates suggest the US economy expanded at an annualized 2.6 percent in fourth quarter 2022. Few doubt that housing markets softened, consumers cut spending, and businesses slowed hiring in the quarter, but inventory accumulation and corporate investment levels may play havoc with the headline print.
Other data printed at the same time might show durable goods orders increasing 2.4 percent in December from the prior month. And initial claims for jobless benefits are seen climbing to 205,000 in the week ended January 21 – up from the prior week’s abnormally-low 190,000. More evidence of a deceleration in the US factory sector should come when the Kansas City Federal Reserve releases its January manufacturing survey. The index is expected to fall to -10 from December’s -9 reading.