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Price action slows into US growth data and European rate decision

The dollar is rising ahead of data that is likely to show the American economy expanding at a remarkably-aggressive pace in the third quarter, defying widespread expectations for a slowdown. Consensus estimates suggest this morning’s data will show output growing 4.7 percent in the third quarter, but the “whisper” number is considerably higher, nearing the 5 percent mark, and the Atlanta Federal Reserve’s “nowcasting” model is pointing to a 5.4-percent expansion. Anything in this range would serve to highlight the yawning performance gap between the US and its major counterparts, and would mark the latest in a long line of post-pandemic surprises, with the economy performing far better than almost anyone expected at the end of the second quarter.

Ten-year Treasury yields are flirting with the 5 percent threshold again after yesterday’s weak five-year auction exacerbated concerns about whether investors would continue absorbing an ever-increasing supply of new debt instruments. With the Federal Reserve actively unwinding its balance sheet, major institutions trimming purchases, and foreign central banks largely sidelined, auctions have had a “tail” for months – a gap between the yield anticipated and the yield ultimately accepted – with marginal buyers demanding a 1.9 basis-point premium over market rates in yesterday’s iteration.

Funding strains could grow in the weeks ahead: House Republicans elected a new Speaker from the hard-right end of the party, making a government shutdown around the current November 17 deadline more likely. The hitherto largely-unknown Mike Johnson faces fewer political constraints than his immediate predecessor, but is widely expected to insist on large-scale spending cuts and a separation between funding bills for Israel and Ukraine, setting the House on a collision course with the Biden administration.

The Canadian dollar remains extremely weak, with a more dovish outlook from the Bank of Canada intersecting with rising US yields to tilt rate differentials even more firmly against the currency. The central bank yesterday extended the timeframe over which price growth is expected to return to target, but revised growth estimates lower across the forecast horizon, suggesting that underlying economic risks were beginning to trump inflation pressures in determining the policy path. Market participants are overwhelmingly convinced that rates have hit a peak, with data between now and the December decision – growth, employment, and inflation – considered unlikely to prompt another hike.

And the euro is on the defensive as traders brace for this morning’s European Central Bank decision. President Lagarde and her colleagues are likely to keep major policy settings unchanged while repeating the somewhat-obligatory language from earlier statements which referred to rates remaining at current levels for a “sufficiently long duration” to ensure that the inflationary dragon is well and truly slain. But with higher borrowing costs hitting the economy harder than expected and private sector sentiment surveys pointing to a downturn ahead, signs of caution should emerge, helping shift expectations for the first rate cut – currently priced for September 2024 – while impacting cross-Atlantic rate differentials.


Still Ahead

THURSDAY

The European Central Bank will almost certainly stand pat as rapidly-evolving economic conditions put policymakers in a difficult bind. War in the Middle East has ratcheted geopolitical risks higher even as it has raised inflation-critical oil prices, and an early-autumn spike in global bond yields has enhanced monetary policy transmission while threatening to upset a delicate balance between sovereign issuers within the euro area. Higher inflation projections could push policymakers into a final hike at the December meeting, but we suspect slowing growth and widening spreads will keep the Bank on hold through mid-2024, keeping rate differentials tilted against the euro. (08:15 EDT)

The US economy may have grown more than 4 percent on an annualised basis in the third quarter on strong consumer spending, rising inventories, and an improvement in net exports. Consensus forecasts are pointing to an above-4.5 percent print, and the Atlanta Fed’s “nowcasting” tool is currently estimating growth at 5.4 percent – a pace which, if realized, would be five times faster than economists had anticipated when the quarter began. Few expect this pace to hold up. (08:30 EDT)

Aircraft purchases will likely boost the headline durable goods print for September, but with transport excluded, orders likely fell from August’s 0.4-percent pace as businesses and consumers turned more cautious. Economists are forecasting an above-2.5 percent jump in overall orders, but expectations are much lower for “core” orders, which are seen rising just 0.3 percent. (08:30 EDT)

Canada’s equivalent to the US non-farm payrolls report should show labour market conditions remaining relatively tight in August, even as signs of softness began to emerge. More recent data showed the unemployment rate rising in conjunction with a solid increase in the number of new jobs in September (08:30 EDT)

FRIDAY

The Federal Reserve’s preferred inflation indicator is thought to have accelerated slightly in August, with consumer outlays rising at a strong clip on higher gasoline prices and continued wage growth. Consensus forecasts – and Jerome Powell’s comments last week – suggest the core personal consumption expenditures index rose 0.3 percent month-over-month, speeding up from 0.1 percent in August, and climbing 3.7 percent year-over-year. Based on estimates derived from earlier data releases – including retail sales and the non-farm payrolls report – personal spending likely increased at least 0.5 percent, and incomes might have risen 0.4 percent. (08:30 EDT)

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