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Markets Cut Risk Into Holiday Weekend

Trading ranges are tight and liquidity levels are low across financial markets this morning as participants square positions into what could be an eventful holiday weekend. Short-term Treasury yields are inching higher, oil prices are up slightly, and equity futures are edging into a softer session ahead of tomorrow’s US personal consumption expenditures print – which will land amid a Good Friday market closure. Jerome Powell is also scheduled to participate in a discussion at the San Francisco Federal Reserve’s Macroeconomics and Monetary Policy conference at 11:30 tomorrow morning, raising the risk of dramatic moves when markets reopen next week in the unlikely event he says something earth-shaking.

The US dollar is trading near a six week high after Federal Reserve Governor Christopher Waller again argued there is no rush to begin cutting interest rates. “Shorter-term inflation measures are now telling me that progress has slowed and may have stalled,” he warned in a speech delivered to the Economic Club of New York, “Though the February reading is estimated to step down from January’s, this recent pace would not represent significant progress toward 2 percent”. Noting that a number of his colleagues on the central bank’s rate-setting committee had turned more hawkish when preparing the latest “dot plot”, he said “In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data”.

The American economy is losing momentum, but remains far stronger than almost anyone expected. The Atlanta Fed’s GDPNow nowcasting model suggests that real gross domestic product growth could end the quarter near 2.1 percent, with tomorrow’s personal income and expenditures report carrying the potential for a final upgrade.

The greenback continues to follow ‘dollar smile’ dynamics. The theory – originally advanced by Morgan Stanley’s Stephen Jen – suggests that the greenback tends to increase in value against other currencies when the US economy is extremely weak or very strong. It goes up at either end of the spectrum – just like a smile – and falls in the middle when global growth differentials narrow and investors move money overseas. We think cooling US growth – particularly in employment measures – and relative stability in other economies will put downward pressure on the greenback in the quarter ahead, but still don’t expect losses to come close to the consensus forecasts established at the end of 2023.


Still Ahead

THURSDAY

The Canadian economy probably grew slightly slower than Statistics Canada’s 0.4-percent early estimate in January, and with the rebound largely coming from a cessation in public sector strike activity, it should remain clear that all is not well in the broader economy. February’s preliminary number might look better though – oil prices are up, housing markets are seeing a flurry of activity, and the number of hours worked is rising. We don’t rule out an early-year rebound in growth that tops the Bank of Canada’s last 0.5-percent estimate for the first quarter. (08:30 EDT)

Canada SEPH January’s Canadian Survey of Employment, Payrolls and Hours should show job vacancies declining further, while wage growth continues to soften. (08:30 EDT)

FRIDAY

The Federal Reserve’s preferred inflation indicator – the core personal consumption expenditures index – likely slowed in February, with early estimates suggesting that the month-over-month increase dropped to 0.3 percent, down from 0.4 percent in the prior month. Surprises are unlikely: both the consumer price index and producer price index anticipate the print, and during last week’s post-decision press conference, Jerome Powell said he expected a print “well below 30 basis points,” suggesting that the seasonal issues that plagued January’s report would begin to fall out of the data. Strong hiring, hours worked, and wage growth should help keep the personal income and expenditures numbers aloft, pointing to continued resilience in US consumer spending levels. (08:30 EDT)

North American markets are closed for Good Friday, and currency market liquidity will be thin, potentially exaggerating the impact of any unusual developments.

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