In a return to the “good news is bad news” dynamic that drove price action through the post-global financial crisis years, markets are back in risk-off mode this morning. Data out yesterday showed US housing starts jumped in May by the most since 2016, providing more evidence of underlying resilience in the world’s largest economy – while also making additional rate hikes more likely. The dollar is higher, yields are flat, and commodity-linked currencies are down across the board.

Jerome Powell is expected to deliver a hawkish message when he appears in front of the House Financial Services Committee this morning. Last week’s “dot plot” showed most Federal Reserve officials expect to raise rates at least twice more this year, but investors are unconvinced – the likelihood of a hike at the central bank’s July meeting is holding below the 75-percent mark, and the odds on another move in 2023 remain vanishingly low. Mr. Powell will attempt to bring the two sides into closer alignment by suggesting that financial conditions need to tighten in order to decisively bring inflation down, meaning that – even if the pace has slowed – the direction of travel for rates is still upward. We doubt he’ll succeed.

The Chicago Fed’s Austan Goolsbee and Cleveland’s Loretta Mester will speak later in the day, adding to the mixed signals received in markets. 

The pound surged and two-year gilts briefly yielded the most since 2008 after a stubbornly-hot inflation print bolstered bets on more rate increases from the Bank of England. According to the Office for National Statistics, headline prices climbed 8.7 percent in the year to May, unchanged from the prior month and higher than market expectations that had been set closer to 8.4 percent. Core prices rose 7.1 percent from 6.8percent in April, marking the fastest annual advance since 1992. Although knee-jerk reactions are now fading in currency markets, fixed-income investors are assigning circa-40-percent odds to a half-percentage point hike at Thursday’s central bank meeting, up from the quarter-point move previously expected, and terminal rate expectations are pushing toward the 6 percent threshold.

Canada is expected to report a modest rebound in retail sales shortly, with headline receipts climbing 0.2 percent in April, while the core measure rises 0.4 percent. An early estimate for May might show another incremental gain, but an overall softening in consumer demand seems probable as the impact of the Bank of Canada’s interminable tightening campaign hits home. We think minutes from the central bank’s last meeting, due for release this afternoon, could weaken the exchange rate by illustrating a lack of unanimity among board members on the need for further rate increases, but this isn’t a strong conviction call – we expected a hike in July, not June.