Risk appetite is improving this morning after yesterday’s softer-than-expected price data and relatively dovish comments from Federal Reserve chair Jerome Powell helped ratify expectations for rate cuts in the remainder of the year. Ten year yields are holding near 4.35 percent, the greenback is on the defensive, and the euro and pound are advancing ahead of the North American equity market open.

Treasury yields slipped and the dollar suffered its biggest drop in a month when the Institute for Supply Management’s services index dropped to 51.4 from 52.6 in February, with the “prices paid’ sub index falling to the lowest levels in four years. Speaking at the Stanford Graduate School of Business a little later, Powell said “Recent readings on both job gains and inflation have come in higher than expected,” but “do not, however, materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labour market, and inflation moving down toward 2 percent on a sometimes bumpy path”.

This looks more like a correction than a fundamental shift, given that it came after bond markets saw the most violent selloff since January’s consumer inflation surprise earlier in the week. Signs of strength in the Institute for Supply Management’s manufacturing index – paired with a jump in prices paid for physical inputs – triggered a jump in yields and the dollar on Monday and Tuesday, despite the fact that the factory sector remains far smaller than the services part of the economy. Expectations for monetary easing have pulled back, and now appear closely aligned with the Federal Reserve’s own projections, with roughly three cuts priced into swap markets.

The Canadian dollar is gaining some support from rising oil prices – both global crude benchmarks are holding near five-month highs after Israel launched missile strikes on the organisation that runs Iran’s network of proxy militias earlier in the week – but a turn in sentiment on the domestic economy is generating the bulk of the gains. The Bank of Canada’s latest surveys showed businesses and households reporting an improvement in economic and credit conditions, adding to surprisingly-positive January and February gross domestic product figures in pointing to a rebound in activity. We think policymakers will deliver more subdued inflation projections in next week’s Monetary Policy Report – helping to clear the way for a rate cut by June – but with growth risks turning to the upside, hawkish language is likely to remain minimal.

Still ahead today: The US will print weekly jobless claims at 8:30 am, helping calibrate expectations ahead of tomorrow’s payrolls report. Minutes taken during the Mexican central bank’s last meeting will shed light on the degree to which officials are likely to remain data-dependent in future decisions. And by our reckoning, no fewer than five Fed officials will make appearances, with Philly’s Harker, Richmond’s Barkin, Chicago’s Goolsbee, Cleveland’s Mester, Minneapolis’ Kashkari, St. Louis’ Musalem, and Governor Kugler all scheduled to speak. While there may be individual lyrical deviations, the “no rush to cut rates” mantra originally advanced by Governor Waller back in February will likely make up the chorus.

Market reaction to tomorrow’s US jobs data could be somewhat asymmetric. In recent interviews and speeches, Fed chair Jerome Powell has outlined a reaction function that appears more sensitive to downside shocks than to upside surprises – last week he noted that “unexpected weakness” in labour market numbers could draw a policy response, while appearing to suggest that slowing inflation might prompt rate cuts even if employment growth remained strong. This may – arguably – reflect the extent to which immigration flows are helping restrain wage gains, but implies that a print above the 200,000 economic consensus could push yields incrementally higher, while a substantially weaker number could trigger a wholesale reversal in market positioning. In our view, risks to the dollar are tilted to the downside.

Still Ahead

FRIDAY
Economists think roughly 200,000 people were added to US non-farm payrolls in March, down from 275,000 in the prior month, but still well above the number needed to outpace population change. The jobless rate is expected to hold steady at 3.9 percent. Hourly wages are seen rising 0.2 percent month-over-month, up from 0.1 percent in the prior month, although hours worked may have fallen slightly as February’s unusually large gain is washed out of the data. After a string of positive shocks, an upside surprise would hardly come as a surprise, but labour market data has assumed new importance after Federal Reserve Chair Jerome Powell repeatedly suggested that an unexpected softening could put rate cuts on the table more firmly.(08:30 EDT)

Canada’s Labour Force Survey should show the economy continuing to crank out jobs in February, but the unemployment rate likely moved higher, perhaps from 5.8 to 5.9 percent, as population growth outpaced labour demand. Wage growth is expected to hold steady near the 5 percent threshold, while the number of hours worked may have risen more sharply, potentially supporting stronger consumer spending and economic growth in the months ahead. (08:30 EDT)