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Markets mean-revert into month end


With month-end flows increasing and the week’s major data releases still ahead, the dollar is trapped in a consolidative range, North American equity bourses are setting up for a modestly-stronger opening, and Treasury yields are incrementally lower across the front end of the curve.

North America


The number of job vacancies per unemployed worker likely held near the 1.6 mark in July, underlining continued tightness in the US labour market.
This morning’s Job Openings and Labor Turnover Survey (out at 10 am) is expected to show roughly 9.45 million jobs available in the month, with the quits rate – a proxy for worker confidence – staying nearly unchanged around the 2.4 percent mark. A softer print could prove positive for risk appetite, helping bolster bets on a “soft landing” in the economy (and yes, we’re aware of the inconsistency in the spelling above – it’s part of our commitment to keeping U in the job market).

The Conference Board’s confidence index might slip to 116 in August from 117 a month earlier, with modestly-higher gasoline prices and an unremitting tide of negative economic commentary helping to depress the consumer outlook.

On Thursday, the Fed’s preferred inflation measure is expected to accelerate slightly, aligning with Jerome Powell’s commentary in Jackson Hole. Estimates provided along with the chair’s Friday speech showed the core personal consumption expenditures index rising 4.3 percent year over year, up from 4.1 percent in the prior month – but the increase was likely driven by a jump in “portfolio management” prices, which are largely driven by changes in stock market valuations. The trend in underlying price pressures should remain downward-sloping, helping reduce odds on further tightening from the central bank.

The Canadian dollar is still on the defensive, trading on the colder side of the 1.3600 handle against the greenback as growth falters and oil prices remain depressed. Friday’s gross domestic product report is likely to bring more evidence of a slowdown in domestic demand, tilting rate differentials more firmly against the loonie. Our longer-term view remains bearish, but a temporary move higher could come in the coming weeks – if Saudi Arabia cuts production in an effort to offset Iranian exports and Chinese authorities move more decisively toward providing broad-based stimulus, a pop in front-month crude prices seems well within the realm of possibility.

Europe


The euro got some hawkish support yesterday from Governing Council member Robert Holzmann, who told Bloomberg “The economy isn’t doing as well as we had hoped but at the same time, the slowdown isn’t so gigantic that we need to talk about falling into a recession”. “We’re not yet in the clear when it comes to inflation,” he said “If there aren’t any big surprises, I see a case for pushing on with rate increases without taking a pause”. Odds on a rate hike at the September meeting barely budged, with Thursday’s euro-area inflation numbers looming as the next major catalyst for an adjustment in expectations.

Data released prior to Holzmann’s comments showed credit growth turning negative, with loans to the private sector falling and the M3 measure of money supply shrinking 0.4 percent in the year to July. This isn’t a terribly mysterious phenomenon – short-term deposits are moving out into higher-yielding destinations and lending is shrinking as interest rates climb – but it does suggest that the European Central Bank’s monetary tightening efforts are having the desired effect on financial conditions.


Asia Pacific


The offshore Chinese yuan inched slightly lower after Bloomberg said the country’s largest state-owned banks were preparing to lower deposit rates for a third time this year.
The move will protect bank lending margins and support further reductions in mortgage rates – borrowing costs have been coming down under the People’s Bank of China’s guidance – but we’re not confident authorities will succeed in convincing consumers to save less and borrow more. Reducing household interest income might force precautionary savings rates higher as citizens deal with a still-threadbare social safety net by putting more away for healthcare emergencies and retirement – and the effect could be exacerbated as the population’s other major wealth-preservation tool – real estate – becomes more likely to generate negative long-term returns.

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