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Market Briefing: Trading Ranges Shrink Ahead of Non-Farms

Equity futures are weaker and currency market trading volumes are down as investors contemplate higher inflation risks – while bracing for tomorrow’s non-farm payrolls report.

Oil prices are stabilizing around higher levels after gaining sharply in the last week. The North American benchmark, West Texas Intermediate, is trading for $87 a barrel while its global equivalent, Brent, is holding near $93 after the OPEC+ group of producing countries agreed to cut output by a larger-than-expected 2 million barrels a day. Because most members are already failing to meet targets, the number of barrels removed is likely to be far smaller, but the move is likely to raise worldwide inflation expectations, and could mean central banks continue tightening policy – ultimately slowing the global economy.

Markets think the US created roughly 260,000 jobs last month, but after a series of upside surprises, investors are prepared for a rise in interest rates and the dollar if the data comes in better than expected. Traders are broadly avoiding taking large directional positions ahead of the release.

Higher oil prices haven’t given the Canadian dollar much lift, with domestic financial vulnerabilities outweighing any perceived gains in the country’s terms of trade. Wage and price pressures are somewhat more subdued in Canada relative to the US, and exorbitant levels of household debt mean the economy is more sensitive to the higher interest rates that could result from a rise in global energy costs. With the Bank of Canada expected to tread more cautiously, yield differentials continue to favour the greenback – US government bonds out-pay their Canadian equivalents by 30 basis points at the two-year horizon and 48 at the ten-year. Bank of Canada Governor Tiff Macklem will deliver an update on the economy and inflation in Halifax later this morning.

The OPEC+ group of oil exporting countries is set to decide on a production cut at this morning’s meeting. Major news organizations are suggesting output could be reduced by 1 – 2 million barrels a day as cartel members seek to support prices near current levels against a weaker global demand backdrop. Markets appear well-prepared – both global oil benchmarks have risen this week, with no evidence of disruptive price action.

Both the pound and the euro are stuck in consolidative trading ranges after failing to break to the topside. Cable is back near the 1.12 mark after attempting to smash through 1.15 against the dollar, and the euro is languishing below 99 after a brief flirtation with parity yesterday morning.

Japan’s yen is holding just above the 145 mark against the dollar, suggesting that higher oil prices are taking a toll, but that market participants believe a “line in the sand” has been established by policymakers.

The number of Americans submitting initial applications for unemployment benefits is seen rising to 203,000 last week, up from 193,000 in the prior week. Jobless claims have remained remarkably low even as other aspects of the employment market—like the number of job openings—have softened.

A slew of policymakers are scheduled to speak, including Treasury Secretary Yellen and Fed officials Kashkari, Evans, Cook, Waller, and Mester. With expectations for interest rate cuts in 2023 remaining intact, markets will be alert for any evidence of a softening in inflation-fighting language.

Karl Schamotta, Chief Market Strategist

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