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Markets are little changed this morning as a sense of calm returns after Tuesday’s traumatic reset in rate expectations. The dollar is dropping against most majors, yields are lower, and equity indices are slightly weaker ahead of two critical pieces of economic data – tomorrow’s non-farm payrolls report and next week’s consumer-price index – that could change the monetary policy outlook.

In yesterday’s Congressional testimony, Federal Reserve chair Jerome Powell largely repeated Tuesday’s hawkish message, but added cautious qualifiers to soften the blow. “We have not made any decision about the March meeting,” he said, “If — and I stress that no decision has been made on this — but if the totality of the data were to indicate that faster tightening is warranted, we’d be prepared to increase the pace of rate hikes”. “We have some potentially important data coming up,” he warned, emphasizing the central bank’s willingness to change its mind in response to new information.

According to data released as Powell spoke, demand for workers remained robust in January. The Bureau of Labor Statistics Job Openings and Labor Turnover Survey, or JOLTS, showed the ratio of available positions to unemployed people, a measure Powell has said he watches closely, slipped to 1.9 – below levels reached earlier in the recovery, but well above pre-pandemic averages.

In a more worrisome sign, the number of construction job openings plunged by 240,000, or nearly 50 percent from the prior month, suggesting that rate hikes are taking a renewed toll on activity in a sector long considered one of the most accurate leading indicators for overall economic growth.

On today’s agenda, the number of initial claims for unemployment benefits is seen hitting 195,000 in the week ended March 4, remaining far below levels that would be indicative of growing stress in US labour markets.

The Fed’s Vice Chair for Supervision, Michael Barr, will discuss cryptocurrencies at the Peterson Institute for International Economics, but the implications for actual currencies should be limited.

Bank of Canada Senior Deputy Governor Carolyn Rogers will deliver an “Economic Progress Report” in Winnipeg later this morning, with investors listening for more context surrounding yesterday’s decision. The central bank was the first among its major counterparts to pause its monetary tightening campaign in the face of an expected drop in inflation pressures, but markets remain convinced that at least one more hike is coming this year. Rogers could shed light on what might be required to move policymakers off the sidelines, helping illuminate the degree to which the Governing Council retains a hawkish bias.

The Canadian dollar remains sharply weaker, simultaneously slammed by widening interest rate differentials with the greenback and by higher household borrowing costs. A move toward the pair’s October low around 1.3885 cannot be ruled out, particularly if tomorrow’s payrolls number surprises to the upside, but we think the loonie’s slide is looking overstretched on a technical basis. The currency could edge upward as volatility levels in fixed income markets subside and expectations stabilize around the Fed’s rate trajectory.

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