Financial markets are trading sideways ahead of an information-dense trading week that will be packed with economic data releases and earnings reports – on top of the usual White House drama. The dollar is up incrementally against its major peers on hopes for a raft of symbolic trade deals, Treasury yields are holding steady, and futures on North American equity markets are edging marginally lower as investors brace for a deluge of negative guidance from US corporates;.
Former central banker Mark Carney is well ahead in the polls going into today’s Canadian election, with many voters seeing him as the candidate best equipped to fight the country’s corner in Washington. But Pierre Poilievre’s Conservatives have built an (arguably) stronger policy platform and enjoy a solid base of support among young people – specifically men, and especially in the Western provinces – making an upset possible, particularly if polling errors in other countries are repeated here.
Foreign exchange markets look remarkably unworried. Risk reversals – which measure the cost of insuring against a big downside move in the currency – are trading well below post-pandemic averages after declining sharply in the last month. This seems well-justified, given the relatively centrist policy stances recently adopted by both major parties, but we think the risk of a minority government – which might force the victor to seek an alliance with the nominally-separatist Bloc Québécois and generally complicate the business of government – may be understated. A negative reaction could be seen in the Canadian dollar if neither party succeeds in securing a majority.
Data releases through the remainder of the week could paint a somewhat-contradictory view of conditions in the American economy. Tomorrow’s job openings and labor turnover survey could see demand for workers recovering slightly in March relative to the prior month, but the Conference Board’s April measure of consumer confidence is likely to show households taking an increasingly pessimistic view on the future, aligning – directionally, at least – with the sharp rise in inflation and job loss fears exhibited in Friday’s University of Michigan update.
On Wednesday, the first-quarter gross domestic product release might alarm some observers by pointing to near-zero growth levels in the first three months of the year, but this will almost certainly be tied to the front-running of tariffs by importers, and final domestic demand – sometimes a cleaner read of underlying fundamentals – might land closer to positive territory for now. Personal income and spending numbers, due at the same time, could prove equally misleading, with households also front-loading purchases against a tame inflation backdrop in which import tax-driven price increases have yet to show up.
In contrast, Thursday’s update from the Institute for Supply Management could illustrate continued weakness in the manufacturing sector – with factory activity remaining in contractionary territory – and Friday’s all-important payrolls report is likely to confirm a steady downshift in job creation. Improving weather conditions probably helped the construction sector make a positive contribution, but many businesses in trade- and logistics-related industries have put hiring plans on hold, and companies in areas exposed to shifts in discretionary spending – like leisure and hospitality – undoubtedly turned more cautious. Economists think the unemployment rate will hold at 4.2 percent, and see 125,000 jobs added in April, representing a sharp drop from the 228,000 added in the previous month.
Markets will respond in accordance with the Fed’s shift toward a new reaction function. In a break with Chair Powell’s relatively-hawkish speech in the prior week – when he underlined the growing tension between the two ends of the central bank’s dual mandate – several officials last week suggested that they would “look through” tariff-led price increases and are prepared to cut rates if signs of labour market softness begin emerge in the coming months. Upside surprises in this week’s data could therefore weaken asset prices as investors move to anticipate a longer period of indecisiveness from officials, while signs of a material slowdown might boost the odds on four or more rate cuts coming this year – something that could reduce the gravitational forces acting on financial markets.
More broadly, we are watching for signs that the “de-dollarisation” theme of recent weeks will be sustained. In the near term, the euro’s extreme year-to-date outperformance could fade a bit as investors take a more pragmatic view on the bloc’s fundamentals, upside in the Canadian dollar could be limited by underlying economic malaise, and the safe-haven Swiss franc and Japanese yen might retrace lower on signs of a softening in the US-led trade war. The greenback seems poised for a modest technically-driven recovery. But there’s little doubt that events in the last few months have diminished the world’s appetite for US-denominated assets, and from a valuation perspective, the currency remains well above long-term averages. We don’t expect a linear depreciation in the months and years ahead, but an environment in which rallies are smaller and sell-offs are larger could gradually chip away at the trade-weighted exchange rate, ultimately helping some members of the Trump administration to achieve their rebalancing goals.
