The greenback is staging a modest recovery this morning – not because traders are suddenly coming to the realization that Federal Reserve rate cut expectations have overshot, but because expectations for other central banks are falling even faster.

Investors expect six rate cuts from the European Central Bank next year after German factory orders fell unexpectedly in October, adding to a mountain of evidence suggesting that the powerhouse of the euro area economy is in recession. Demand for manufactured goods fell -3.7 percent, coming in well below the 0.2-percent increase expected by economists as machinery and equipment orders plunged. In the euro area’s more bank-dependent financial system, monetary tightening efforts are transmitting more quickly than in other regions, with surveys showing weaker credit growth hammering consumer spending and business investment plans.

The yen is weaker even after a senior Bank of Japan official made the case for higher policy rates. Talking with a group of business leaders, Deputy Governor Ryozo Himino repeated the standard dovish caveats, but said that a move into positive rate territory could offer benefits, noting that households would earn more on their savings, pension funds would see higher returns, and corporations could gain from a “virtuous cycle between wages and prices”. Investors remained unimpressed, with positioning in swap markets pointing to a rise in rates around July next year – several months later than was expected in early November.

Expectations for US policy cuts remain relatively firm as traders position ahead of Friday’s non-farm payrolls report. Data out yesterday showed the number of vacant positions available for every unemployed person fell to 1.34 in October, the lowest in two-and-a-half years, and down from 1.47 in September. Today’s ADP’s private-sector employment report is expected to show the US economy generating 128,000 jobs in November, up from 113,000 in the prior month – but markets should give this short shrift, given a tenuous-at-best relationship with the official non-farm payrolls report.

We’re not aware of any economic forecaster expecting a change in the Bank of Canada’s policy rate this morning. Tiff Macklem & Co. could choose to execute a “dovish hold,” setting the stage for cuts in early 2024 by emphasizing slowing growth and falling headline inflation rates. This would be well-justified – as we’ve discussed previously, many of the indicators we monitor are telling us the economy is on the edge of a recession, implying that policy is probably too tight. But we think it’s still too early: wage growth is still strong, inflation expectations remain stubbornly elevated, and officials will want to avoid exacerbating price pressures by encouraging a renewed easing in financial conditions. Tomorrow’s speech from Deputy Governor Toni Gravelle – traditionally used as an opportunity to explain the Bank’s thinking – could prove more interesting for markets, with nuances emerging that are impossible to express in a statement-only decision.

Please note: Our Bank of Canada market wire will be slightly delayed due to a scheduling conflict.

 
Still Ahead

WEDNESDAY

The Bank of Canada is widely expected to stay on hold until the early new year, with excess demand evaporating, economic growth stagnating, and inflation pressures showing clear signs of subsiding toward target. Policymakers have little choice but to remain rhetorically hawkish for now – according to central bank orthodoxy, price risks could flare up again at any time – but markets are likely to ignore this, with most investors remaining convinced the first rate cuts will begin by April 2024. (10:00 EDT)

FRIDAY

Economists believe the United States generated another 200,000 jobs in November. Unemployment is seen holding steady at 3.9 percent, and average hourly earnings are expected to tick 0.3 percent higher on a month-over-month basis, up from 0.2 percent in October. Assuming that the data isn’t terribly distorted by the resolution of the United Auto Workers strike, risks are somewhat tilted to the downside – but the unemployment rate still looks unlikely to rise enough to trigger the “Sahm Rule” recession indicator. Instead, signs of softness will likely be welcomed in markets. (08:30 EDT)