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Risk appetite fades after Powell shuts door on doves

Foreign exchange markets are trading with a mild risk-off tone after yesterday’s disappointing Treasury auction and hawkish commentary from Federal Reserve chair Jerome Powell helped lift yields and bolster demand for the dollar. Equity futures are setting up for a modestly softer open, commodity prices are still trending downward, and rate-sensitive currencies—like the Canadian dollar—are back on the defensive.

Yields reversed higher yesterday morning after a $24-billion auction of 30-year Treasuries failed to meet sufficient demand, with a “tail”—the extra premium demanded by investors to hold long-term paper—exceeding 5 basis points. The pension funds and insurers which typically absorb the lion’s share of long-duration instruments have been expressing increasing concern about persistent inflation and the US government’s fiscal trajectory, but the disruption may have been exacerbated by a cyberattack on the Industrial and Commercial Bank of China—the world’s biggest bank—which forced it to clear trades on a physical USB stick and led major primary dealer counterparties to trade more cautiously.

Traders moved the expected timing for the Fed’s first quarter-point rate cut out from June to July next year after Powell warned policymakers “will not hesitate” to raise rates further if inflation fails to subside”. In opening remarks ahead of an International Monetary Fund conference in Washington, he said “We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening”. Importantly, he noted that a gradual post-pandemic improvement in the supply side of the economy – the normalization in production processes, shipping, and logistics – could soon reach its limits in slowing price growth, saying “Going forward, it may be that a greater share of the progress in reducing inflation will have to come from tight monetary policy restraining the growth of aggregate demand”.

Powell’s remarks were initially interrupted by a group of climate protesters, prompting him to say “Just close the f*cking door” on a live microphone. To those of us who like seeing flashes of humanity and personality from our monetary mandarins, this was highly enjoyable. But he might as well have said the same thing to markets, which have repeatedly assigned overly-dovish interpretations to his communications – including during last week’s post-meeting press conference. Despite all the changes in the global economy and markets that have unfolded over the last three years, investors still seem convinced the door is open to a return to pre-pandemic rate dynamics and a reset in central bank reaction functions. We very much doubt it.

The British pound is failing to make headway despite a report suggesting that the economy again skirted recession in the third quarter. According to updated numbers from the Office for National Statistics, headline gross domestic product was effectively unchanged from the second quarter, beating expectations for a -0.1-percent contraction. Details below the headline pointed to a slowdown however, with household consumption, business investment, and government spending all turning negative, while a rise in exports relative to imports—generally indicative of weakness in underlying demand—artificially flattered the print. We’re increasingly convinced the Bank of England could cut rates more quickly and aggressively than the Fed by the end of next year – and markets aren’t far behind us in thinking so.

Ahead today: The headline-making but rarely market-moving University of Michigan index is expected to show consumer sentiment remaining weak in early November, but partisan differences – Democrats think the economy is fine, while Republicans think a recession has been underway for several years – will again render the print meaningless. The deluge of Fed speakers will slow to a trickle today, with Dallas’ Lorie Logan, Atlanta’s Bostic and San Francisco’s Daly due to make scheduled appearances.

Still Ahead


Experimental numbers from the Office for National Statistics should show British wage growth slipping slightly in the three months to September, bolstering the Bank of England’s confidence in its monetary tightening efforts. Markets expect average ex-bonus weekly earnings to slip toward 7.7 percent in the period, down from 7.8 percent, combining with lower vacancies, slower job growth, and higher unemployment claims to indicate a broad-based slackening in labour market conditions. (02:00 EDT)

On a headline basis, US inflation probably kept decelerating in October, with falling gasoline prices pointing toward a sub-3.3-percent year-over-year print, down from 3.7 percent in September. But the core measure – which strips out highly-volatile food and energy components – may remain stubbornly strong, holding at 4.1 percent as medical cost adjustments and vehicle prices stay sticky, keeping the Fed on alert. (08:30 EDT)

The Japanese economy likely turned in a lacklustre performance in the third quarter, with weak consumer spending and a downward lurch in net exports seen dragging it into a -0.9-percent annualized contraction. With US consumers poised to retrench and Chinese demand suffering under a housing-led slowdown, further softness is likely in the fourth quarter, helping convince us that the Bank of Japan is unlikely to move decisively out of negative rates territory anytime soon. (19:00 EDT)


Markets think British inflation likely fell to a two-year low in October, helping set the stage for an eventual reversal in the Bank of England’s policy settings. Headline consumer prices are seen rising 4.8 percent year-over-year in the month, down sharply from 6.7 percent in September as household energy bills plummeted and softness emerged in the food, tangible goods, and services segments. The core measure might see less deceleration, printing closer to 6.7 percent after topping 6.9 percent in the prior month, but market participants and central bankers are united in the understanding that this is likely to subside more slowly over time. (02:00 EDT)

US retail sales likely tumbled in October, with declining vehicle volumes and a drop in gasoline prices helping pull the headline print down to -0.3 percent – or lower. Control group sales—which exclude vehicles, gas, food, and building materials—probably turned in a slightly better performance, edging higher on a month-over-month basis, but should also exhibit signs of strain as earnings growth slows, pandemic era savings are depleted, and consumers turn more cautious. That said, we’ve been repeatedly surprised by the strength of US household demand, and upside shocks are possible. (08:30 EDT)

Chinese industrial production, fixed asset investment, and retail sales numbers should combine to paint a picture of an economy that began bottoming out in October, but generally one that is generally failing to show decisive signs of improvement. Year-over-year comparables should stay strongly positive, given 2022’s zero-covid distortions, but underlying momentum clearly remains weak: recent survey data suggests that factories are still slowing, taking a toll on business investment, while a years-long downturn in the property sector hits consumer spending.

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