Markets are unwinding risk haven trades this morning, following a pattern established over the last several weekends, with Gaza-related geopolitical exposures forcing traders to square positions before each Friday close, only to reopen them each Monday. With Israeli forces advancing more cautiously than had been feared, oil prices are down, gold is coming under selling pressure, and equity futures are edging higher.

The dollar is broadly softening against its major counterparts – including the Canadian dollar – but ten-year Treasury yields are again pushing past the 4.85-percent mark as investors brace for a tumultuous week in fixed income markets.

The euro is modestly stronger after the German economy shrank by less than expected in the third quarter, helping boost expectations for tomorrow’s bloc-wide growth print. Output contracted -0.1 percent in the three months ended in September after a 0.1-percent gain in the prior quarter, beating forecasts for a -0.2 percent decline as household spending and fixed asset investment held up better than anticipated. The common currency looks set to challenge last week’s high around the 1.0610 mark in the absence of other catalysts, but remains under pressure as investors price in three or more rate cuts from the European Central Bank in 2024.

An incredibly busy week beckons: The Bank of Japan is expected to stay on hold tomorrow, but with a small contingent of market participants betting on a reversal in yield curve control policies, some turbulence is likely around the announcement. Tomorrow will also bring key growth and inflation numbers for the euro area, gross domestic product results in Canada, and the Federal Reserve’s preferred wage price indicator. The Federal Reserve should drop another “hawkish hold” on Wednesday, and the Bank of England is likely to deliver something similar on Thursday. Friday will see simultaneous employment reports landing on both sides of the 49th Parallel, with both likely to show signs of rapid deceleration relative to the prior month.

China’s national financial work conference might prove market-moving, potentially delivering news of enhanced stimulus spending and other measures to stabilize credit growth. Any indication policymakers are moving to support the country’s beleaguered property sector could trigger a massive risk-on move in commodity markets and help drag the dollar lower.

But the most important global data releases will likely come at 3 pm this afternoon, when the Treasury discloses its estimates for the amount of marketable debt that will be issued over the next six months, and on Wednesday morning, when it provides a breakdown of planned auction frequencies and sizes. Markets expect another $115 billion in insurance over the next three months, with shorter-term bills back in favour after the volume of longer-term instruments strained demand in the third quarter.

 
Still Ahead

TUESDAY

Despite growing market confidence in an imminent shift away from yield curve control policies, we think the Bank of Japan will leave its major monetary settings unchanged for now, with officials waiting for clearer evidence of a sustained rise in wage pressures before making further adjustments. Updated forecasts should show inflation projections rising through 2024 but remaining well-anchored in 2025, reducing the need for policy tweaks in the here and now. (TBA)

Economists think growth flatlined in the euro area during the third quarter, giving central bankers room to stay on hold for now. Consensus forecasts suggest gross domestic product expanded 0.0 percent in the three months ended September, down from 0.2 percent in the prior period as a slowdown in industrial activity intersected with higher borrowing costs to weigh on business investment and consumer consumption. Early indicators are pointing to a continued deceleration in the fourth quarter, but the economy has demonstrated remarkable resilience amid a series of shocks over the last two years, and could remain surprisingly stable. (06:00 EDT)

Euro area inflation probably slipped again in October, helping bolster bets on a prolonged pause – and eventual climbdown in rates – from the European Central Bank. Markets think headline price gains slowed to 3 percent year-over-year in October from 4.3 percent in the prior month as last year’s jump in energy costs is washed out of the data, while core prices are seen slowing more gradually to 4.2 percent from 4.5 percent previously. Recent gains in oil and natural gas prices could deliver an upside surprise, but with most other categories showing clear signs of slowing, we suspect the implications for monetary policy will be strictly limited.
(06:00 EDT)

Updated numbers from Statistics Canada are likely to show activity expanding by less than 0.1 percent in August, putting the economy on course toward a second consecutive quarter of stagnation. With the manufacturing sector in contraction, residential investment slowing, and consumer spending showing clear signs of rolling over, interest rate sensitivities are having real-world effects, making further monetary tightening from the Bank of Canada ever less likely. (08:30 EDT)

Gains in the Federal Reserve’s preferred measure of wage growth – the Employment Cost Index – are seen decelerating to 4.3 percent year over year in the third quarter, down from 4.5 percent in the prior three months. This will remain above levels consistent with a dampening in excess demand in the US economy, and – combined with other tight labour market indications – could force central bankers into maintaining a hawkish communications bias even as financial conditions tighten. (08:30 EDT)

WEDNESDAY

With post-debt ceiling funding needs remaining elevated, US Treasury officials are expected to announce a significant increase in coupon auction sizes across the curve, but could tilt the bulk of issuance toward shorter-term maturities as they attempt to address a loss of appetite among domestic investors for longer-dated instruments. After fears of a “buyers strike” helped elevate Treasury term premia in recent months, markets will be watching closely to assess whether the volume of planned issuance across maturity buckets could overwhelm demand. (08:30 EDT)

The number of positions available in the US probably slipped only incrementally in August, with skills mismatches helping support demand for workers in a number of understaffed sectors, even as others began to soften. Consensus estimates suggest that the Job Openings and Labour Turnover Survey will show vacancies dropping from 9.6 to 9.2 million in the month, with the quits rate – a proxy for worker confidence levels – holding near 2.3 percent. (10:00 EDT)

Policymakers at the Federal Reserve will almost certainly opt to hold interest rates at prevailing levels as they “proceed carefully,” but with labour markets staying tight, consumer balance sheets retaining considerable spending capacity, oil prices holding at elevated levels, and growth routinely topping forecasts, the case for further tightening remains surprisingly undiminished. A solidly-hawkish bias is to be expected in the statement and post-meeting press conference, with markets listening carefully for a shift in language around the idea that recent increases in long-term yields – blamed on the “term premium” by Jerome Powell, and on improved growth prospects by Janet Yellen – are lifting rates into “sufficiently restrictive” territory. We expect less-senior officials to resume pivoting in a more dovish direction as recessionary signals multiply in the coming months, but this meeting is unlikely to provide an appropriate venue. (14:00 EDT)

THURSDAY

The Bank of England’s Monetary Policy Committee is widely expected to leave the key rate unchanged at 5.25 percent for a second meeting, with Chief Economist Huw Pill’s “Table Mountain” approach to policy looking increasingly likely to play out in reality. After a long series of positive surprises, growth has slowed, unemployment has risen, and wage growth is easing, helping pull market-implied odds on a final rate hike below coin-toss levels. Updated forecasts should show further increases in unemployment in coming months, with price targets and monetary policy settings reverting toward normal levels over a longer time horizon. (08:00 EDT)

The number of initial claims for jobless benefits submitted last week should hold near the prior week’s 210,000 mark in the absence of a downside catalyst – but some softening could become clear over the succeeding releases. (08:30 EDT)

FRIDAY

October’s non-farm payrolls print might exhibit signs of mean reversion, with job growth halving from September’s astonishing 336,000-strong print. Hiring in the leisure and hospitality sector is likely to revert lower after a temporary surge, ongoing strike activity could spill over into wider conditions, and the unemployment rate should tick up, approaching the 4-percent threshold that some have flagged as providing early warning of a downturn. (08:30 EDT)

The Canadian economy is believed to have added roughly 20,000 roles in October after a 63,800-position gain in the prior month, but the unemployment rate is seen rising to 5.6 percent from 5.5 percent as population growth exceeds job creation. A downside surprise is possible – signs of slowing momentum are obvious throughout most sectors of the economy – but evidence of strain in labour markets could still take a few months to arrive. (08:30 EDT)