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Market Briefing: Strong US retail sales prompt Fed second-guessing, lifting the dollar

Equity futures are pointing to a weaker session, yields are holding ground, and the dollar is edging upward as the impact of yesterday’s stronger-than-expected retail sales report continues to reverberate across the economic landscape. American consumers showed no sign of slowing spending in October, with receipts rising for basic inputs like gas and food, along with higher-value items like furniture and new cars – a dynamic that suggests household balance sheets continue to support increased consumption levels. If this is sustained, the implications for Federal Reserve policy are clear: rates will have to climb higher than currently assumed.

Chancellor Jeremy Hunt said the United Kingdom was likely already in recession as he delivered the long-awaited Autumn Statement this morning. Updated projections from the Office for Budget Responsibility show the British economy shrinking -1.4 percent next year – down sharply from the 1.8 percent expansion previously forecast – and output isn’t expected to hit pre-pandemic levels until 2024.

Under Mr. Hunt’s fiscal plan, taxes will rise and government spending will grow more slowly in the years ahead, with cuts coming in a number of key public service categories. Other measures announced included the lifting of tariffs on hundreds of goods, a reduction in surcharges on bank profits, and an extension of household energy price guarantee that has helped shield citizens against rising costs. Ten-year gilt yields are holding slightly below the levels that prevailed ahead of the announcement and the pound is almost a percentage point weaker.

Republicans clinched a 218th seat in the House of Representatives, ensuring that President Biden’s agenda will run into major roadblocks through the remainder of his term in office. Although the expected “red wave” did not occur, markets have long expected such a shift in the power balance, and financial asset prices have shown no discernible reaction thus far.

Economists think the number of initial claims for unemployment benefits nudged only slightly higher in the week ended November 12. Signs of weakness in the labour market remain practically non-existent even as financial conditions tighten – helping make the Fed’s case for a soft landing seem slightly more plausible than might have been expected a few months ago.

US housing starts are expected to weaken further, dropping to an annualized 1.41 million in October from 1.439 million in the prior month. Activity in the real estate sector has cooled sharply in recent months as borrowing conditions have deteriorated.

Fed officials Bullard, Bowman, Mester, and Kashkari are scheduled to speak. All four are likely to repeat the “slower pace” message that has dominated since the last meeting, but markets will continue looking for guidance on where the tightening cycle might end.

Karl Schamotta, Chief Market Strategist

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