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Markets flatline ahead of inflation print

Traders are keeping their powder dry ahead of this morning’s US consumer price index report, which is expected to show underlying inflation pressures remaining relatively stubborn, keeping the Federal Reserve on a hawkish footing. Equity futures, Treasury yields, and the dollar are moving sideways. The Canadian dollar remains weak amid an absence of domestic catalysts – and against a more cautious risk backdrop.

The British pound is almost unchanged against the dollar and euro after data showed wage growth slowing slightly in the third quarter, but remaining well above the Bank of England’s comfort zone. Earnings excluding bonuses were 7.7 percent higher than a year earlier in the three months ended September, according to the figures from the Office for National Statistics, down from 7.9 percent in the previous two reports. Tomorrow’s consumer price index update is expected to show headline inflation decelerating to an annual rate of 4.8 percent in October – the weakest in two years – from September’s 6.7 percent as base effects wash out, while the core measure is seen easing to 5.8 percent from 6.1 previously. If borne out in reality, this could leave bets on central bank rate cuts in mid-2024 largely unmoved.

The Japanese yen is stable after jumping roughly 50 basis points in less than two minutes yesterday. The move, which soon reversed, highlighted the degree to which trigger-happy market participants are ready to front-run an intervention effort, but rather remarkably, we’re still not seeing a buildup in speculative positioning against the yen. The pair continues to drift lower on persistently-wide rate differentials, but market participants aren’t riding the move with much conviction, and Japanese authorities aren’t seeing the sort of disorderly price action that has traditionally motivated intervention – although that could change in the event that US inflation data shocks to the upside.

The US House of Representatives is set to vote on a bill that would temporarily avert a government shutdown. Under the two-step plan, funding for some government functions would be extended into January, while others would face a February deadline, allowing politicians to work on negotiating longer-lasting agreements. It is believed that Democrats will ultimately help more centrist Republicans pass the measure, but several procedural hurdles need to be overcome first.

A series of Federal Reserve officials are scheduled to make appearances today, including Vice Chair Barr, Vice Chair Jefferson, Cleveland’s Mester, and Chicago’s Goolsbee. All are likely to hew closely to the hawkish party line advanced by Jerome Powell last Thursday, but nuances in how they describe today’s inflation print could attract attention. If policymakers downplay the importance of shelter and healthcare costs – both prone to methodological factors – in driving core price measures higher, investors might lower odds on a final rate hike happening in December or January.

China is set to release October industrial output, fixed-asset investment and retail sales data this evening. Signs of increased stimulus efforts are beginning to trickle out – authorities announced more funding for rural construction projects last night – but sentiment surveys are pointing to continued weakness in the real economy, and until that changes, we struggle to see the yuan, emerging market currencies, or the euro staging a sustained rebound against the dollar.

TUESDAY

On a headline basis, US inflation probably kept decelerating in October, with falling gasoline prices pointing toward a sub-3.3-percent year-over-year print, down from 3.7 percent in September. But the core measure – which strips out highly-volatile food and energy components – may remain stubbornly strong, holding at 4.1 percent as medical cost adjustments and vehicle prices stay sticky, keeping the Fed on alert. (08:30 EDT)

The Japanese economy likely turned in a lacklustre performance in the third quarter, with weak consumer spending and a downward lurch in net exports seen dragging it into a -0.9-percent annualized contraction. With US consumers poised to retrench and Chinese demand suffering under a housing-led slowdown, further softness is likely in the fourth quarter, helping convince us that the Bank of Japan is unlikely to move decisively out of negative rates territory anytime soon. (19:00 EDT)

Chinese industrial production, fixed asset investment, and retail sales numbers should combine to paint a picture of an economy that began bottoming out in October, but generally one that is generally failing to show decisive signs of improvement. Year-over-year comparables should stay strongly positive, given 2022’s zero-covid distortions, but underlying momentum clearly remains weak: recent survey data suggests that factories are still slowing, taking a toll on business investment, while a years-long downturn in the property sector hits consumer spending. (21:00 EDT)

WEDNESDAY

Markets think British inflation likely fell to a two-year low in October, helping set the stage for an eventual reversal in the Bank of England’s policy settings. Headline consumer prices are seen rising 4.8 percent year-over-year in the month, down sharply from 6.7 percent in September as household energy bills plummeted and softness emerged in the food, tangible goods, and services segments. The core measure might see less deceleration, printing closer to 6.7 percent after topping 6.9 percent in the prior month, but market participants and central bankers are united in the understanding that this is likely to subside more slowly over time. (02:00 EDT)

US retail sales likely tumbled in October, with declining vehicle volumes and a drop in gasoline prices helping pull the headline print down to -0.3 percent – or lower. Control group sales—which exclude vehicles, gas, food, and building materials—probably turned in a slightly better performance, edging higher on a month-over-month basis, but should also exhibit signs of strain as earnings growth slows, pandemic era savings are depleted, and consumers turn more cautious. That said, we’ve been repeatedly surprised by the strength of US household demand, and upside shocks are possible. (08:30 EDT)

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