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Santa gets stuck in chimney

Price action in financial markets turned erratic yesterday, with US equity bourses suffering some of the biggest reversals in months. The dollar gained on a flight to safety, Treasury yields crumpled, and risk-sensitive currencies sold off.

We have no idea what triggered the move*, but it appears technical in nature: with the chimney narrowing (liquidity drying up ahead of the holidays) and Santa’s girth expanding (a range of asset classes looking overbought amid the euphoria surrounding the Federal Reserve’s pivot toward easing), some form of correction had become likely.

A recovery is now underway, with stock futures rising into the open, Treasury yields inching up, and the dollar reversing lower. Both the pound and euro are grinding forward over key resistance levels, opening room for further, incremental gains. We expect this trading dynamic to remain intact through tomorrow’s personal consumption expenditures report – and beyond – as markets double down on “soft landing” bets, and think a deeper reality check looks unlikely before the new year.

Minutes taken during the Bank of Canada’s last meeting are – somewhat unusually – impacting the exchange rate. A record of the December 6 discussion, released yesterday, showed officials remaining focused on keeping policy at restrictive levels, joining the Bank of England and European Central Bank in refusing to follow the Federal Reserve in acknowledging the prospect of rate cuts in the new year. On Tuesday, Statistics Canada said inflation had stalled above the central bank’s target range, and released updated population estimates that point to further pressure on the country’s absurdly overvalued housing market. Yield differentials are narrowing and the loonie is climbing as traders push rate cut probabilities further out.

Ahead today: The US is expected to report a small rise in the number of jobless claims submitted in the week ended December 16, and third-quarter gross domestic product will be revised, likely slightly downward. Canada will release extremely stale retail sales and payrolls numbers. And the Conference Board’s US leading economic indicator index is set to spend a 14th consecutive month in recessionary territory, bolstering our (admittedly stubborn) belief that rate cuts in 2024 are unlikely to be of the “immaculate disinflation” variety, and are more likely to come in response to a hard landing in the economy.

*Some are ascribing the selloff to larger-than-normal volumes in zero-day options, but we have a sneaking suspicion that pinning big moves on impossible-to-falsify developments in options markets is just an updated addition to the pantheon of explanations – like “profit taking”, “short covering in the Treasury markets”, or “cash moving to the sidelines” – that pundits resort to when they can’t explain what’s going on.


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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