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Risk appetite subsides ahead of Powell appearance

Treasury yields are holding steady and the dollar is firmer as traders square positions going into Federal Reserve Chair Jerome Powell’s comments at Spelman College this morning. The 11:00 webcast will mark Powell’s last appearance before the pre-meeting blackout period begins ahead of the central bank’s December meeting, and should land during a relatively quiet trading day: Canada will report its latest employment numbers in half an hour, and the Institute for Supply Management’s manufacturing survey is expected to rise to 47.7 in November from 46.7 in the prior month.

Mr. Powell seems likely to avoid declaring “mission accomplished” on inflation, instead working to convince markets of the central bank’s commitment to keeping rates elevated for a prolonged period of time. He will face challenges: over the last week, at least six of his colleagues clearly telegraphed a degree of contentment with current policy settings, a raft of data releases showed the economy on a glide path toward a “soft landing”, and markets moved to price rate cuts into the early part of next year when erstwhile hawk Governor Waller provided both the rationale and timeframe for a reversal, saying “It has nothing to do with trying to save the economy or recession,” if “we feel confident that inflation is really down and on its way, you could start lowering the policy rate just because inflation is lower.”

Oil prices look set to end the week virtually unchanged after yesterday’s OPEC+ meeting ended with a series of output cuts that are seen as unlikely to fully offset demand weakness. The cartel agreed to total reductions totalling approximately 2.193 million barrels a day through the first quarter of 2024, including cuts that were previously implemented by Russia and Saudi Arabia, and incorporating roughly 900,000 barrels that are not part of an official quota.

Brazil was invited to join the group as an observer, and initial signs suggest it will accept. This could conceivably upset the geopolitical status quo, but the head of the state-owned energy conglomerate Petrobras was quoted this morning saying that his country would “never be part of an organization that imposes production cuts on us,” raising questions around Brasilia’s motivations. Nonetheless, at least one Twitter wit has suggested rebranding the group as “BROPEC”, and we think the idea has merit.

The Canadian dollar is on the defensive as investors brace for a slightly-softer November employment report. Market consensus is aligned around a circa-15,000 addition to payrolls, paired with a rise in the unemployment rate from 5.7 percent to 5.8, and a decline in aggregate hours worked as the economy downshifts in response to higher borrowing costs and a weaker global demand outlook. This should help reinforce already-overwhelming odds on a hold at next week’s Bank of Canada meeting, and could raise the likelihood of an imminent recession after yesterday’s less-than-clear growth data muddied the picture.

TUESDAY

October’s Job Openings and Labor Turnover Survey should show a continued decline in the number of vacant positions, with roughly a quarter million listings likely subtracted from the 9.55 million available in the prior month. The quits rate will likely fall more precipitously as a growing sense of caution persuades workers to stop seeking greener pastures. (10:00 EDT)

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. Risks are somewhat tilted to the downside, but the unemployment rate 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)

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