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Markets rise on interrupted shutdown

US markets are gaining this morning after the government reached a last-minute deal to avert a shutdown – but with the same brinksmanship likely to play out again in less than eight weeks, we’re not sure how long the momentum can last. Equity futures are rising ahead of the open, Treasury yields are pushing toward Friday’s highs, and the dollar is climbing against its major Asian and European rivals.

In a surprising and confusing late-Saturday development, House Speaker Kevin McCarthy – who had for weeks refused to consider a similar bipartisan measure crafted in the Senate – agreed to table a temporary plan to keep the government funded through mid-November. The “continuing resolution”, which essentially preserves existing funding levels, was passed by both houses under the understanding that funding for Ukraine would be negotiated separately – an understanding which puts McCarthy on a collision course with a group of hard-right Republicans with the power to evict him from his position, and one that could lead to a repeat of the weekend’s drama in less than six weeks.

China’s official manufacturing purchasing manager index climbed into expansionary territory for the first time since March last month, and a similar measure of services sector activity improved. The National Bureau of Statistics’ factory index rose to 50.2 in September from 49.7 in August – above the 50 threshold that separates expansion from contraction – and its non-manufacturing gauge rose to 51.7 from 51 in the prior month. Construction activity also accelerated, indicating that government spending on infrastructure was playing a more supportive role. The offshore renminbi kicked higher at last night’s Asia open, but gains have since faded, suggesting that market participants see more headwinds ahead.

The yen is hovering near the 149 mark once again after Bank of Japan Governor Kazuo Ueda said there was “still a distance to go” before the central bank could unwind its ultra-low monetary policy settings. Traders remain unwilling to push the exchange rate beyond the 150 mark, but we aren’t sure the government has drawn a “line in the sand” on such a simplistic basis – a break above could see the currency move through several big handles before prompting another round of intervention.

The Canadian dollar remains sharply weaker after Friday’s update from Statistics Canada showed the economy flatlining in July and August, suggesting that the Bank of Canada’s rate hikes are having the desired effect – and diminishing the need for more. According to the data and the advance estimate, growth stalled in the summer months, putting the economy on course toward a very modest rebound after hitting a pothole in the second quarter. We remain convinced the Canadian economy’s deep vulnerabilities (encapsulated in household and private sector debt levels that are vastly higher than those seen in the United States) will see activity slow more meaningfully in the quarters ahead, preventing further rate increases and – eventually – setting the stage for rate cuts aligned with the Fed’s.

Both the pound and euro remain on the defensive, with peak rate expectations having come down sharply in the last few weeks. Market participants think the European Central Bank is done hiking rates – just 3 basis points of tightening remain priced in for early 2024 – and the Bank of England is almost there, with roughly 17 basis points seen over the same period. Disinflationary dynamics remain powerful across the region, and recent increases in oil prices are expected to act as a drag on household spending – not as a spur to a recovery in underlying inflation pressures.

Ahead today: S&P’s latest US manufacturing purchasing manager index and the Institute for Supply Management’s September manufacturing index should give market participants a view into underlying price and industrial production dynamics. Fed speakers include Governor Powell and Philly’s Patrick Harker – participating in a small-business round-table – and Cleveland’s Loretta Mester, who will provide an economic update this evening.


Still Ahead

MONDAY

The Reserve Bank of Australia is likely to follow its advanced-economy counterparts in delivering a “hawkish hold”. Michele Bullock’s first meeting as Governor should see policymakers attempting to balance signs of domestic weakness – most recently exhibited in weak housing and consumer confidence numbers – with strong job growth and oil price-driven gains in consumer price indices. Markets are unlikely to take hawkish rhetoric at face value, and should remain convinced rate cuts will begin in early 2024. (23:30 EDT)

TUESDAY

The latest Job Openings and Labor Turnover report is expected to show employment conditions softening further in August, giving the Fed more room to stay on the sidelines. The number of vacant positions is seen creeping up to 9 million in August, implying that there were 1.4 positions available per unemployed worker, down from 1.5 in the prior month. The quits rate – a proxy for overall labour demand – should continue falling. (10:00 EDT)

WEDNESDAY

Services sector activity probably cooled further in September, driving the Institute for Supply Management’s index down to 53.5 from 54.5 in August. Consumer sentiment is weakening as gas prices climb, labour markets slow, and student loan payments resume, but household spending on intangibles has avoided outright contraction thus far. (10:00 EDT)

THURSDAY

Initial claims for unemployment benefits should begin rising in coming weeks as the Big Three automakers begin laying off non-union employees, but the increase shouldn’t yet appear in Thursday’s data, which will cover the week ended September 30. Consensus forecasts are pointing to a print close to 210,000, up incrementally from 204,000 in the previous week. (08:30)

FRIDAY

The US job creation engine probably slowed further in September, with just 160,000 people added to non-farm payrolls, down from 187,000 in August. The unemployment rate and monthly average hourly earnings growth are seen holding at 3.8 percent and 0.2 percent, respectively. (08:30 EDT)

Data released in synchrony with the US non-farm payrolls report should show conditions worsening in Canada’s labour market, with job growth slowing from August’s surprising 39,900-position gain, and the unemployment rate ratcheting higher up to 5.6 percent from 5.5 in the prior month. (08:30 EDT)

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