A sense of caution has settled over currency markets this morning as hopes for a recovery in the Chinese economy fade – and as participants brace for a liquidity-thinned week in which accidents can have bigger-than-normal consequences. The dollar is up against most of its risk-sensitive rivals after the number of coronavirus cases in China continued to climb, forcing several cities back into lockdown, and demolishing the idea that consumer demand would suddenly spring back to life.

This comes even as markets have become increasingly convinced that US inflation is rolling over against a still-robust economic backdrop – bringing the Federal Reserve’s semi-mythical “soft landing” scenario into the realm of possibility.

Oil markets continue to slump, with both global benchmarks down more than 8 percent this month. Prices are purportedly falling as traders anticipate a cooling in global consumption levels, but we remain unconvinced this is the whole story – inventory levels are well below seasonal norms, and expectations for the world economy haven’t undergone terribly drastic revisions in the last few weeks – we suspect a positioning-related shift is underway, raising questions about the sustainability of the move.

With US market participants more focused on avoiding turkey-cooking disasters (don’t stuff it, just spatchcock it, trust us on this), trading activity should slow through the days ahead – but a number of important releases are crammed into Wednesday’s session.

Economists expect durable goods orders will weaken in October, particularly at the consumer products level. Highly-volatile aircraft, defence, and transportation categories are seen lifting headline growth to 0.4 percent month-over-month, but with those categories excluded, spending on high-ticket-price items may be flirting with contractionary territory.

Initial jobless claims are projected to rise incrementally to 225,000 from 222,000 in the prior week. Labour markets appear to be softening, but claims data has continued to defy skeptics, rising only slightly in the face of solid demand from employers.

The University of Michigan’s final reading for November consumer sentiment is seen remaining near the 55.1 level previously reported. A surprise increase in inflation expectations could be revised downward, but growing economic uncertainty and rising prices will likely keep consumers in a depressed mood.

New home sales will almost certainly continue trending lower, but investors think the October print could surprise to the upside as hurricane-related activity artificially skews the month-over-month data.

Minutes from the Federal Reserve’s November meeting could deliver a market shock in the afternoon, particularly if policymakers express a lack of confidence in the peak inflation narrative. We expect officials will broadly agree that tightening should slow from the three-quarter-point-per-meeting pace hit in recent months, but terminal rate expectations could move higher – potentially past the 5-percent mark – if the committee remains convinced that the risk of doing too much is outweighed by the risk of doing too little.

A record of the European Central Bank’s October meeting will be published on Thursday, giving traders insight into the governing council’s stance on future rate hikes. At the time, President Lagarde said policymakers would assess the inflation outlook, the level of prevailing rates, and the lagged impact of previous decisions before making any policy changes – wording that seemed to lay the foundation for a more gradual pace of tightening.

Most observers are expecting a half-percentage-point increase in each of the Bank’s three policy rates at the December meeting, with a smaller contingent betting on an even bigger move. In an interview this morning, Chief Economist Philip Lane said “one platform for considering a very large hike, such as 75 basis points, is no longer there,” but emphasized the “secondary” nature of individual rate decisions, following Fed chair Jerome Powell in saying that the ultimate destination matters more than the outcome at any single meeting.

Karl Schamotta, Chief Market Strategist