Happy Friday. Markets are pausing for breath after a tumultuous week of inflation shocks coupled with a sharp deterioration in sentiment toward the artificial-intelligence buildout. Equity futures are edging higher after days of losses, Treasuries are steadying, and Brent crude is holding near $105 a barrel as the supply outlook fails to improve. On the week, the dollar is down roughly 0.5%, with virtually all of its major counterparts, the Japanese yen excepted, up by similar margins.
US inflation pressures are showing clear signs of acceleration. Producer prices rose at the fastest monthly pace in more than four years in September, smashing forecasts and putting the pieces in place for a jump in the core personal consumption expenditures index—the Federal Reserve’s preferred inflation measure—to around 3.1% on a year-over-year basis when it is updated later this month. Today’s import price data should land near the highest levels since the summer of 2022.
Yields are plateauing anyway, suggesting that investors are seeking safety and marking down nominal growth expectations as borrowing costs climb and the artificial-intelligence boom loses momentum.
It is hard to know how far this will go. This week’s turmoil may be a dress rehearsal for how a deflating bubble could ripple through the financial system, but does not yet look like the “big one”. The selloff is clearly reflective of growing worries about the most heavily indebted technology firms, but the damage has not spread to sentiment more broadly, and investors seem to be rotating out of frothy names and into defensive sectors in a fairly orderly way.
A period of consolidation could be the most likely near-term outcome in foreign exchange markets. An eventual softening in the AI boom points to a more bearish long-term outlook for the dollar, but the currency could hold its altitude for now as consumers continue to run down savings, hyperscalers build out infrastructure, and the government runs large fiscal deficits, while supply shocks from Iran, tariffs, and immigration controls keep Fed tightening expectations aloft. The euro could grind slightly higher as pressure on sovereign bond markets eases, but its gains will remain capped as long as energy prices stay high and uncertainty mounts ahead of next year’s French election. Markets may scale back expectations for tightening from the European Central Bank in the coming months, and something similar could play out in the UK, where higher borrowing costs are likely to weigh on growth in the fourth quarter.
Here in Canada, the jury is out until Monday, when September’s inflation update should help clarify monetary policy expectations. Economists think headline prices climbed 3.2% year on year, up from 3.0% previously, on a jump in energy costs, but an average of the core measures targeted by the Bank of Canada is expected to come in closer to 2%—right on target and unchanged from August. Such an outcome would underline the divergence between the US and Canada, with Canada exhibiting little evidence of spillover into demand-driven categories, and could keep rate differentials tilted against the loonie. Alternatively, an upside surprise in the core measures—mirroring this week’s US data—could see traders adding to bets on a December hike, and reinforcing expectations for at least two more in 2027.
A break of this year’s trading range seems unlikely, however, without a major shift in global fundamentals. Measured in percentage terms, the Canadian dollar’s range so far this year is the narrowest in almost three decades (with the exception of the unusually calm 2019), reflecting a terms-of-trade cushion provided by rising energy prices, a degree of synchrony between central banks on either side of the 49th parallel, and high policy uncertainty that has limited directional positioning. Barring a collapse in US equity prices or an outbreak of peace in the Middle East, it is difficult to see the loonie embarking on a sustained rally for now.
