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Markets turn more cautious on Fed pivot

Markets are turning in a mixed performance this morning as continued optimism surrounding the prospect of a soft landing in the US economy intersects with deepening concern among market veterans over the extent to which positioning has become overstretched. Equity futures are pointing to a modestly-softer open, Treasury yields are slipping, and the dollar is holding steady.

Oil prices are holding near two-week highs on the prospect of continued disruption along the Red Sea shipping route. A series of attacks by Iran-backed Houthi militias based in Yemen have forced major shipping companies to reroute cargoes out of the area, with Moller-Maersk, BP, and Equinox saying they would send ships around the Cape of Good Hope even after the US announced the creation of a multi-national task force to protect traffic.

Underpinned by stronger crude prices, the Canadian dollar is holding near a four-month high ahead of a report expected to show inflation falling back into the Bank of Canada’s target range in November. Headline consumer price growth is expected to hit 2.9 percent year-over-year, down from 3.1 percent in the prior month on a drop in gas and food costs, while the core measure might hold at 3.4 percent, primarily sustained by higher interest rates on mortgages. Although few expect a rapid shift onto an easing stance, Bank of Canada Governor Tiff Macklem opened the door in an interview with BNN Bloomberg yesterday, suggesting that he expected to begin cutting rates next year.

The yen is down more than a full percentage point after the Bank of Japan opted to keep interest rates in negative territory and left its dovish forward guidance unchanged last night. Speaking during the post-decision press conference, Governor Ueda said “Uncertainty over the outlook is extremely high and we have yet to foresee inflation sustainably and stably achieving our target. As such, it’s hard to know now with a high degree of certainty how we can exit”. We remain convinced that a move toward positive rates could come in April after the shuntō wage negotiations provide clarity on underlying price pressures.

Perhaps taken aback by the scale of the market reaction that unfolded after last Wednesday’s press conference, Federal Reserve officials spent the last few days warning investors against over-extrapolating Jerome Powell’s comments. On Friday, the New York Fed’s John Williams warned it was “premature” to think about cutting rates in March, and the Atlanta Fed’s Raphael Bostic warned officials would want to see “several months” of declining inflation before considering an easing in policy. Yesterday, Cleveland’s Loretta Mester and Chicago’s Austan Goolsbee echoed similar sentiments, insisting that they remain focused on how long to hold rates at restrictive levels, not on how much to cut them by. Goolsbee said “I thought there seemed to be some confusion about how the FOMC (Federal Open Market Committee) even works. We don’t debate specific policies speculatively about the future”.

We suspect markets could find it increasingly difficult to reconcile contradictions between the prospect of a “soft landing” (which might prompt a gradual easing in policy) and a much harder impact (which would trigger a more rapid series of cuts) in setting prices through the end of the year. Positioning looks overly optimistic and several pullbacks could be in the offing as liquidity evaporates in the coming weeks.


Consumer price growth likely continued its deceleration in the United Kingdom last month. Headline inflation is seen subsiding to 4.3 percent year-over-year, down from 4.6 percent in the prior month on a softening in food, energy, and goods prices, while the core measure – more heavily influenced by domestic wage pressures – may stay elevated around 5.6 percent. (02:00 EDT)

If other sentiment indices are any indication, the Conference Board’s US consumer confidence survey should show signs of improvement in early December. The headline index is expected to rise to 104 from 102 in the prior month, but the expectations component is likely to stay in extremely depressed territory, remaining consistent with an incoming recession. (10:00 EDT)


Canada’s survey of employment payrolls and hours should show a continued softening in demand for workers in October, with vacancies slipping in line with a previously-reported rise in the unemployment rate. (08:30 EDT)

An advance estimate for retail sales in November might sow confusion by indicating strong demand among Canadian consumers, but we suspect underlying details will remain consistent with a gradual cooling in the country’s spending engine. Slowing wage gains, still-elevated prices, and skyrocketing borrowing costs are likely hammering household budgets and limiting growth during the traditionally-strong holiday season. (08:30 EDT)


The Federal Reserve’s favourite inflation indicator – the core personal consumption expenditures index – is seen rising less than 0.2 percent month-over-month in November, maintaining an annualized pace consistent with the central bank’s 2-percent target. Income growth likely accelerated in line with rising wages and hiring activity, and spending probably lurched higher ahead of the all-important holiday bacchanalia. (08:30 EDT)

Ex-transportation durable goods orders likely turned in another half-hearted performance in November, rising just 0.1 percent on increased caution among households and businesses. (08:30 EDT)

Canada’s economy probably came close to flatlining in October, although consensus estimates are still pointing to a 0.2-percent gain. We think a broad-based decline is underway, with a range of indicators suggesting the country’s economy is already in recession, or tiptoeing to the edge of one. (08:30 EDT)

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Twists & turns

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