Risk appetites are on the wane in financial markets once again this morning, with a raft of critical data releases looming even as geopolitical tensions simmer in the background. Treasury yields are edging higher, with the ten-year pushing back through 4.75 percent, equity futures oriented toward a slightly softer open, and Brent prices holding above the $90 mark. The dollar is still showing signs of strength relative to the euro and yen, but gains have slowed relative to the pace set last week.

Investors are still processing the implications of President Biden’s freshly-announced trip to Israel, in which he is expected to offer additional moral support to the embattled nation while also working to ensure safe passage for millions of Gazan civilians trapped in the cross-fire. Iran’s foreign minister last night said “pre-emptive actions” by the “resistance front” could be expected in the “coming hours,” but with the US parking two supercarrier groups – each capable of mustering more firepower than most nation-states – off the Levant, and moving a Marine expeditionary unit – equipped for amphibious landings – into the area to bolster Israel’s already-formidable military, we suspect the likelihood of regional escalation has subsided sharply. This is contributing to a wider move out of risk havens in the foreign exchange markets, and to a broad decline in volatility expectations across currency, equity, and commodity asset classes – with oil prices, in particular, coming down gradually from levels reached last week.

The pound is softening after labour market conditions eased in the three months to August, giving the Bank of England room to avoid hiking rates in coming months. In a partially-postponed release this morning, the Office for National Statistics said regular year-over-year pay growth, excluding bonuses, slowed to 7.8 percent, down from a revised 7.9 percent in the prior month. Vacancies – extracted from a separate data set – dropped to 988,000 in the three months to September, down from 998,000 previously, and all off a peak near 1,300,000 in mid-2012. Huw Pill, the Bank’s chief economist, yesterday suggested that wage growth was still not “consistent with price stability,” but noted that it looked like an “outlier” against a broader trends in employment markets.

Traders are braced for two key North American data releases this morning:

US retail sales numbers for September are expected to exhibit signs of a slowdown in consumer spending, with vehicle and gasoline purchases lifting otherwise-lacklustre receipts to a 0.2-percent month-over-month gain. Control group sales – which exclude cars, gas, food services, and building materials – may post an outright decline, helping lower inflation pressure and weaken the case for a final rate hike from the Federal Reserve this year.

In contrast, a stubbornly-strong Canadian inflation print could bolster odds on another move at the Bank of Canada’s October 25 meeting. Although both the headline all-items and core baskets are likely to show continued signs of moderation, the Bank’s preferred measures – median and trim – might remain sticky. The Bank’s third-quarter Business Outlook Survey yesterday showed businesses planning to raise prices more often – and in larger increments – than prior to the pandemic, even as they expect to slow investment and hiring activity. Most think inflation will take more than three years to return to target.

We hesitate to read too much into central bank rhetoric at this juncture – policymakers everywhere are clearly incentivized to maintain a hawkish posture until inflation can be considered well and truly vanquished – but Governor Macklem’s comments last week appeared aimed at preparing markets for a potential hike later this month. In warning “We’re not going to be forecasting a serious recession,” saying “Inflation’s still too high, it’s still too broad-based,” and noting that a recent run-up in yields wouldn’t substitute for more restrictive monetary policy settings, he seemed intent on downplaying signs of slowing momentum in the Canadian economy. Although we don’t think further tightening is justified at this juncture, we’re not comfortable ruling it out – and we worry markets are underpricing the possibility.

 
Still Ahead

TUESDAY

A raft of Chinese activity data could trigger a modest reversal in global market sentiment, with stimulus efforts likely to show signs of gaining traction in the world’s second-largest economy. Gross domestic product is seen expanding 4.5 percent in the third quarter, industrial production should post a 4.3 percent year-over-year gain, fixed asset investment might flatline at 3.2 percent year-over-year, and September retail sales could rise to 4.8 percent from the prior month’s 4.6-percent pace. (22:00 EDT)

WEDNESDAY

Markets expect British headline inflation to continue its slide in September, dropping to 6.5 percent year-over-year, down from 6.7 percent in the prior month, shrugging off a significant rise in gasoline prices. Core consumer prices should also ease, but the key services cost aggregate could slip more slowly, exhibiting signs of stubborn price pressures in wage-driven areas of the economy. (02:00 EDT)

THURSDAY

Fed Chairman Jerome Powell is expected to follow most of his colleagues in delivering a “near peak” message on rates, but could surprise with a more hawkish tone when he addresses the Economic Club of New York. After September’s consumer and producer price indices surprised to the upside and non-farm payrolls blew the doors off, there are good fundamental reasons for thinking rates should move further into restrictive territory – however, with other soft data indicators pointing to a slowdown ahead, we think a cautious approach remains well justified. (12:00 EDT)

FRIDAY

The British high street probably saw renewed losses in September, with consumer demand slowing as borrowing costs ratchet up. Consensus forecasts suggest retail sales contracted -0.2 percent month-over-month, down from August’s surprisingly-robust 0.4-percent gain (02:00 EDT)

Statistics Canada’s preliminary forecast for August retail sales showed a -0.3-percent drop, with weaker auto sales likely partially offset by a jump in gasoline prices – suggesting that underlying consumer spending likely moved into contractionary territory. The advance estimate for September will be closely watched, with any sign of softness likely to drive the Canadian dollar lower on the prospect of a deeper spending slowdown. (08:30 EDT)

Japanese consumer inflation might show signs of exhaustion in September, helping pour more cold water on the prospect of a sharp adjustment in the Bank of Japan’s policy settings. The year-over-year rise in headline prices is expected to drop toward 3 percent after hitting 3.2 percent in the prior month, and the core measure – which in Japan excludes fresh food – could slip to 2.7 percent from 3.1 percent in August. Imported costs – emanating from a global rise in energy prices and a domestically-driven decline in the yen – could remain elevated for months yet, but aren’t likely to justify a wholesale repudiation of the central bank’s easy-money policies. (19:30 EDT)