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Uneasy calm prevails ahead of US data

Currency markets are marking time ahead of data that is expected to show US economic activity slowing from the pace set in the third quarter. The October personal income and spending report should show signs of an across-the-board deceleration, with weaker wage growth and increasing consumer restraint translating into softer inflation rates. Increases in the Federal Reserve’s preferred measure – the core personal consumption expenditures index – are seen falling to 0.2 percent month-over-month, down from 0.3 percent previously, and 3.5 percent year-over-year, versus the prior 3.7 percent. This would put underlying inflation pressures on track toward undershooting the central bank’s year-end forecast, further ratifying already non-existent odds on a final rate hike in this cycle.

Inflation in the euro area slowed more quickly than economists expected in early November, bolstering bets on a pivot from the European Central Bank next year. Headline consumer prices rose just 2.4 percent from a year ago, down from 2.9 percent in October, and the core measure – which excludes food and fuel costs – slowed to 3.6 percent. The euro is tumbling, down almost a full percentage point from its high earlier in the week as traders position for rate cuts beginning in April, with European policymakers now seen following in the Fed’s footsteps far more closer than was expected only a month ago.

Separate data illustrated the dire conditions facing the euro area economy. A second revision showed French gross domestic product shrinking unexpectedly in the third quarter, and German unemployment climbed to 5.9 percent in November from 5.8 percent in the prior month, with demand for labour continuing to fade in the face of tighter domestic credit conditions and slower global growth.

In China, one of Germany’s biggest markets, activity slowed in November, confounding hopes for a modest rebound. The National Bureau of Statistics’ official purchasing manager index dropped to 49.4, spending a second month below the 50 threshold that separates expansion from contraction. A sub-index that exclusively measures non-manufacturing activity slipped to 50.2, and the even narrower services index tumbled to 49.3, underlining the extent to which consumer demand has followed the property and export sectors lower.

Oil prices are inching up as rumours swirl of a larger-than-expected supply cut at this morning’s OPEC+ meeting. Unsubstantiated reports are suggesting that other countries are prepared to add to Saudi Arabia’s voluntary 1 million barrel-per-day reductions, but details are sparse, and the sequence of events over the last two weeks would suggest exercising caution around trading any headlines that emerge. Global demand forecasts continue to weaken, and non-OPEC supply growth is still adding to fundamental price pressures.

The Canadian dollar is slipping ahead of this morning’s third-quarter gross domestic product report. Consensus estimates suggest that the economy eked out a modest gain in the three months ended September, but we think a negative surprise is possible – yesterday’s current account number raised the likelihood of a net export-driven knock to the headline print, and other indicators are pointing to a slowdown in labour markets paired with a drop in consumer spending.


We are looking for another decline in job creation in Canada’s November Labour Force Survey, adding to October’s print in offsetting strong gains through August and September. Even if the headline is positive, the mix between full- and part-time jobs will be critical in discerning the underlying trend, with seasonal retail hiring ramping up even as a profound slowdown in the services sector drags down growth. The unemployment rate is likely to rise as labour markets fail to absorb higher immigration levels. (08:30 EDT)

The Institute for Supply Management’s manufacturing gauge likely stayed in contractionary territory in November, but a modest pickup in demand should mean that the pace of deterioration has slowed somewhat. Markets will review respondent anecdotes closely however, with more talk of “recession” helping moderate any potential revival in animal spirits. (10:00 EDT)

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