As hopes for a policy “pivot” fade, US Treasury yields are continuing their inexorable ascent this morning. Equity markets look set to extend yesterday’s losses, commodities are coming under renewed pressure, and currency traders are buying the dollar once again.

Terminal rate expectations are still rising. In a speech yesterday, the Philadelphia Fed’s Patrick Harker said “Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4 percent by the end of the year,” and warned tightening would likely continue into 2023, saying “Sometime next year, we are going to stop hiking rates”. The market-implied Federal Funds rate is sitting around 5 percent in March, up almost 50 basis points from two weeks ago.

And a policy reversal is looking less likely. Markets no longer expect the Fed to follow a decades-old playbook in which it tightens policy aggressively and responds to the ensuing economic downturn by cutting rates. Investors are now looking for a single 25 basis point cut by the end of next year, and the ten-year yield is climbing as longer-term expectations are revised up.

After surging as the lettuce-long Liz Truss premiership ended yesterday, the pound is tumbling on the prospect of more political upheaval. According to bookmakers, Rishi Sunak, the market-savvy former chancellor, is the odds-on favourite in the race to succeed her, but Boris Johnson is climbing the rankings fast, pushing past Penny Mordaunt as his allies pledge support. Markets are unlikely to roll out the welcome mat for a second Johnson administration.

Data out earlier this morning showed retail sales slumping by more than expected in September, underlining growing weakness in the UK economy. Odds on a 125-basis point hike at the Bank of England’s November meeting have plunged, with a 75 basis point move now considered more likely.

The yen kept falling over the cycle, dropping to 151.50 on interbank markets as rumours of small-scale central bank intervention failed to stop the selling. Trading patterns suggest that policymakers are achieving their stated goals – limiting price swings, but not defending specific levels – as gauges of short-term realized volatility remain relatively low. The exchange rate is plumbing its weakest levels since 1990, and could grind even lower if monetary policy divergences remain intact.

China’s onshore yuan is trading near lows last hit during the global financial crisis as the economy slows and US yields power higher. Market participants expect selling pressure to intensify after the Communist Party congress ends this weekend.

Statistics Canada will release August retail sales numbers – along with an estimate for September – in less than half an hour. Markets think sales rose roughly 0.4 percent in August, even as gas prices slumped. But with spending patterns shifting back to services and consumer sentiment deteriorating, September looks likely to print at much lower levels, reinforcing evidence of a prolonged slowdown.

There are no major economic data releases scheduled for the US today. Federal Reserve speakers include New York’s John Williams and San Francisco’s Mary Daly.

Next week brings central bank decisions in Canada, Brazil, Japan and the Euro Area, along with North American growth numbers and the Fed’s preferred inflation and wage price indicators. Boredom will be the least of our problems.

Karl Schamotta, Chief Market Strategist