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Another round of stronger-than-expected US activity data combined with surging oil prices to send Treasury yields roaring to new cyclical peaks yesterday, triggering yet another spike in the dollar. Durable goods orders surprised with a 0.2-percent gain in August – markets had expected a -0.5 percent contraction – and non-defence capital spending climbed 0.9 percent, suggesting that the business investment cycle remained in relatively robust health. West Texas Intermediate prices briefly jumped above the $95 mark after the Energy Information Administration said crude inventories at the Cushing, Oklahoma delivery hub fell to less than 22 million barrels, nearing tank bottoms and approaching the lowest seasonal levels since 20

Japanese Finance Minister Shunichi Suzuki took another stab at jawboning the yen higher, calling excessive moves in the currency markets “undesirable” and warning that authorities “won’t rule out any options” in responding. With the exchange rate nearing the 150 mark, traders generally see intervention as a “when, not if” at this point, with questions swirling around the timing and scale of the effort.

The euro bounced off the 1.05 mark overnight, but remains under widespread selling pressure after updated numbers showed the credit impulse turning more contractionary than during the euro crisis in the mid-2010’s. Bank lending to households grew just 0.1 percent and corporate volumes fell -0.4 percent on a month-over-month seasonally adjusted basis in August, meaning that monetary transmission will continue to act as a headwind for growth through the autumn months. Bloc-wide inflation numbers, out tomorrow, are expected to show price pressures fading in September, giving the European Central Bank room to avoid hiking rates again.

The Canadian dollar remains stuck around the 1.35 round-number handle ahead of tomorrow’s gross domestic product print. Although the exchange rate has fallen in nominal terms, the currency has held up remarkably well against the US dollar onslaught, outperforming most of its major counterparts on rising oil prices and a slight narrowing in rate differentials. We expect both to give way over the next few months, with lower growth estimates in tomorrow’s data helping to bring Bank of Canada expectations into closer alignment with the Fed’s implied rate trajectory – but a turn in the greenback could mitigate some of the negative effects on the loonie, potentially generating short-lived periods of strength.

Ahead of the North American open, yields on ten-year Treasuries are holding near the 4.64-percent mark, equity futures are setting up for a modest rebound, and volatility measures are correcting incrementally lower. At 8:30, a final estimate of second-quarter gross domestic product could be revised up to 2.2 percent from 2.1 percent, and US jobless claims are seen rising to 214,000 in the week ended September 23 from 201,000 a week earlier. Later in the day, Federal Reserve speakers include Chicago’s Goolsbee, Governor Cook, Chair Powell, and Richmond’s Barkin, with Goolsbee and Barkin most likely to deliver market-moving insight.

But risks keep piling up in the background. Hard-right Republicans in the House look intent on driving the US government into a shutdown this weekend, with Speaker McCarthy suggesting that he won’t bring yesterday’s bipartisan Senate funding bill to the floor – instead choosing to push his own bill, which is widely viewed as a non-starter. Rhetoric coming from both sides of the picket line suggests that the United Auto Workers strike will widen to more plants tomorrow. Student loan repayments could take a relatively sudden toll on household activity. Soaring borrowing costs and elevated oil prices could clobber business investment and inflict a serious blow on consumer spending.

We think volatility expectations remain too low.


Still Ahead

THURSDAY

The Canadian payrolls numbers (less timely than the Labour Force Survey) should illustrate a softening in job vacancy numbers and underlying labour demand in July, but won’t shed much light on current conditions. Upside surprises are unlikely to impact markets – most participants are convinced the economy is losing momentum – while a downside shock could reinforce already-bearish positioning. (08:30 EDT)

Mexico’s central bank is seen holding rates again, and indicating that it will continue to do so for a while yet. Inflation has slowed, but remains far above the policy target, domestic demand is going strong, and the government is opening the spending taps ahead of next year’s presidential election. The peso’s strongly-positive carry profile should remain intact for now. (15:00 EDT)

FRIDAY

Underlying euro-area inflation pressures should continue cooling in September. Consensus estimates suggest that headline prices rose 4.5 percent year-over-year in the month, down from 5.2 percent in the prior month, with the core measure slipping to 4.8 percent from 5.3, but the data could surprise to the downside as base effects, statistical adjustment issues, and a drop in services demand contrive to put downward pressure on price calculations. (05:00 EDT)

The Federal Reserve’s preferred inflation indicator is expected to climb at an annualized pace consistent with the central bank’s target in August. The core personal consumption expenditures index is seen pushing just 0.2 percent higher, with personal income rising 0.4 percent, and spending growth slowing from the previous month’s 0.8 percent to 0.4 percent. We expect the first negative spending prints to come within months as excess savings are wound down, student loan repayments ramp up, and employment conditions cool – but the US consumer has repeatedly proven us (and markets) wrong this year, so we can’t rule anything out. (08:30 EDT)

Canadian growth data for July are likely to align closely with Statistics Canada’s initial estimate, with the expansion flatlining as consumer spending weakens and business investment hits a wall. But a number of transitory effects – including strikes and forest fires – could plague the data, obscuring any meaningful signal. Markets will focus more closely on the advance estimate for August. (08:30 EDT)

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