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Santa Rally continues, bolstering risk-sensitive currencies

Markets are pushing higher this morning as investors continue to front-run rate cuts, largely ignoring the protestations of Federal Reserve officials themselves. Equity futures are pointing to a stronger open, Treasury yields are down, and the dollar is slipping against its major rivals even after the Atlanta’s Fed’s Raphael Bostic said “I’m thinking inflation is going to come down relatively slowly in the next six months, which means there’s not going to be urgency for us to pull off our restrictive stance”. Richmond’s Thomas Barkin told Yahoo Finance policymakers would “respond appropriately” to slowing price growth, but warned “I’ve got a perspective that inflation is a little stubborner than the average person… and I hope I am wrong on that”.

The Canadian dollar is sitting well above yesterday’s open after inflation failed to decelerate in November, seemingly making an earlier pivot to easing more difficult for the Bank of Canada. Consumer prices were up 3.1 percent from a year prior, matching the pace in the prior month, and the central bank’s preferred measures – median and trim, stayed unchanged at 3.4 and 3.5 percent, respectively. Policymakers may be relatively unperturbed – with shelter costs (significantly influenced by monetary policy) excluded, prices were up just 1.9 percent year-over-year, well within the central bank’s comfort zone – and we suspect expectations for rate cuts will ultimately ratchet back to pre-release levels, leaving the Canadian dollar to trade on changes in global risk appetite once again.

Inflation fell far more sharply than expected in the UK last month, reducing odds on a more prolonged easing trajectory from the Bank of England. Headline prices rose just 3.9 percent in the year to November, the slowest pace since September 2021, and well below the 4.4 percent expected in markets. Core inflation, which has proven more stubborn in all major developed economies, fell to 5.1 percent from 5.7 in the prior month, led by a slowdown in services price growth. The pound is down sharply, with swaps markets pointing to the first rate cut coming in May, with at least four more to follow over the course of 2024 as officials follow what Chief Economist Huw Pill called a “Table Mountain” policy path.

The euro is also on the defensive after softer-than-expected inflation data. German producer prices fell by -7.9 percent year over year in November – mostly on falling energy costs – but also tumbled -0.5 percent from October in a sign that weak demand and falling import costs from China are feeding through into Europe’s inflation impulse. Expectations for rate cuts in 2024 are gradually firming, with many market participants expecting the European Central Bank to buck historical patterns in easing faster and more aggressively than the Fed.

Ahead today: At 10 this morning, the Conference Board’s consumer confidence index is expected to rise to 104 in December from 102 a month earlier. Existing home sales are seen falling to an annualized 3.76 million in November from 3.79 in the prior month. The Chicago Fed’s Goolsbee – not a voter in 2024, but an influential voice in policy circles – will appear on a Wall Street Journal podcast at noon. And the Bank of Canada will release a summary of deliberations from its last policy meeting at 1:30.

Traders are likely to keep their powder dry until US personal consumption data and Canadian growth numbers are released on Friday morning, but diminishing liquidity could see markets exhibiting strange price action in the hours and days to come.


If other sentiment indices are any indication, the Conference Board’s US consumer confidence survey should show signs of improvement in early December. The headline index is expected to rise to 104 from 102 in the prior month, but the expectations component is likely to stay in extremely depressed territory, remaining consistent with an incoming recession. (10:00 EDT)


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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