Risk appetite is improving after a flock of Federal Reserve officials executed what looked a lot like a communications pivot yesterday, shifting away from the higher-for-longer message that dominated rhetoric for months. Speaking at an economics conference, the Dallas Fed’s Lorie Logan suggested that a rise in the bond term premium – the yield difference demanded by investors for taking long-term risk – “could do some of the work of cooling the economy for us, leaving less need for additional monetary tightening”, and her colleague Vice Chair Jefferson said “We are in a sensitive period of risk management, where we have to balance the risk of not having tightened enough, against the risk of policy becoming too restrictive”. Last Thursday, San Francisco’s Mary Daly said “if financial conditions, which have tightened considerably in the past ninety days, remain tight, the need for us to take further action is diminished”.
Treasury yields are down across the curve and the dollar is steady as market-implied odds on a rate hike by year end push below 25 percent – down from coin-toss levels a little over a week ago. Equity futures are pointing to a rebound at the open.
More broadly, the weekend’s attack on Israel continues to roil global markets, but moves in oil prices have been surprisingly restrained. Front-month prices are up a few dollars from last week’s levels – even as traders brace for a potential reduction in Iranian export volumes – marking a stark contrast with norms established prior to the re-emergence of the United States as a major producer.
The Bank of Israel’s intervention efforts appear to be gaining traction, stemming losses in the shekel around the 3.95 mark. The central bank yesterday pledged to deploy $45 billion in reserves and swap liquidity in an effort to support the currency, and speculators are aware that policymakers have both the experience and the capacity to do much more. The outlook is cloudy: the exchange rate fell roughly 16 percent during the 2014 Gaza war, but the political situation is drastically different, with Prime Minister Netanyahu’s political fortunes likely to play a heavy role in driving price action in the months ahead.
The Canadian dollar – once considered a petro-currency – is entering the North American session on a stronger footing as a broader easing in financial conditions outweighs oil prices in driving its gains. In a similar vein, the pound, euro, and yen are gaining support from a narrowing in rate differentials, shrugging off higher energy costs and a rise in background geopolitical risk.
The giant Chinese property developer Country Gardens moved closer to a debt restructuring last night, saying it “expects that it will not be able to meet all of its offshore payment obligations when due or within the relevant grace periods”. With distress continuing to worsen across the country’s all-important real estate sector, consumer confidence looks unlikely to rebound without a concerted stimulus effort from policymakers – but the renminbi is trading as if one is coming. Both onshore and offshore yuan pools have inched higher since the Golden Week holiday ended, and could get another leg up in coming days on an announcement.
There are no major data releases scheduled for today in North America, but Fed speakers will include Atlanta’s Bostic, Governor Waller, Minneapolis’ Kashkari, and San Francisco’s Daly. We would note that Kashkari – once one of the most dovish members of the rate-setting committee and now one of its most hawkish – could serve as a bellwether, clinching bets on early-2024 rate cuts by turning more cautious.
Still Ahead
WEDNESDAY
Minutes taken during the Federal Reserve’s September meeting should contain a heavier emphasis on downside risks – strain was evident in the consumer spending and business confidence data available at the time – and some exploration of how tighter financial conditions might impact the economy. With another potential government shutdown looming, discussion surrounding the September 30 deadline could provide insight into the central bank’s reaction function in November. (14:00 EDT)
THURSDAY
The Office for National Statistics is expected to say the UK economy slowed further in August, with elevated inflation, high borrowing costs, and widespread strike action combining to dampen activity across manufacturing and services sectors alike. But gross domestic product has surprised to the upside repeatedly, and recent revisions showed the country turning in a relatively respectable performance through much of the post-pandemic period. Signs of resilience could yet push the Bank of England into hiking rates further – although we doubt it. (02:00 EDT)
The European Central Bank’s September meeting ended in a statement widely perceived as dovish – seemingly telegraphing an end to tightening – but leaks afterward suggested that some officials had maintained a more hawkish bias, and speeches since have confirmed more hikes are possible if inflation remains elevated. It’s not our base case, but markets could react to a more aggressive tone in the meeting record by raising odds on a last move in 2023. (07:30 EDT)
Core US consumer prices are seen climbing 0.4 percent month over month in September, accelerating slightly from 0.3 percent in the prior month on a rise in used car costs. The all-items measure should weaken more materially as August’s jump in gasoline prices is washed out of the data, bringing the print down to 0.4 percent from 0.6 percent previously. (08:30 EDT)