Global Macro and Markets

Global Markets: The US Treasury curve flattened a bit on Friday. 2Y Treasury yields rose a couple of basis points and the yield on 10Y UST’s came down a similar amount. The 10Y yield is now 4.4%. EURUSD drifted down to the low end of 1.04 on Friday but has risen in early trading today to 1.0481. The rest of the G-10 FX pairs also show some early strength today after losing ground on Friday. USDJPY has dropped from 154.8 to 154.17 so far today. The moves are being interpreted as reflecting President-elect Trump's more measured pick of Scott Bessent as Treasury Secretary. Asian FX was mixed on Friday. The KRW lost more than half a per cent, rising to 1406, and the TWD was also soft. But there were gains for the THB and IDR. Some broader gains seem likely today. US equities made small gains on Friday, but Chinese equity markets remained very soft. The CSI 300 dropped 3.1% and the Hang Seng was down 1.89%

G7 Macro: Last week ended fairly quietly, though some stronger-than-expected US PMI figures may encourage thoughts that we get another fairly decent non-farm payroll release next week. Who knows…this number remains a lottery. Today, Germany’s Ifo survey is probably the pick of the day, and will likely confirm the weak activity that we already know about. This week’s highlight will be the US core PCE inflation figures, which will likely show that inflation continues to be stubborn, and may weigh on rate cut expectations.

China: The PBOC is scheduled to announce the medium-term lending facility rate this morning. We expect the rate to be held unchanged at 2.0% after no adjustments to the 7-day reverse repo rate so far this month.

Taiwan, China: October industrial production data will be published in the afternoon. We expect growth to moderate to 9.2% YoY after the last five months of low to mid-double-digit growth, taking into account a less supportive base effect. In recent months, the strength has been primarily driven by the Computers, Electronic & Optical Products and semiconductor categories, and while this trend is expected to continue the base effect becomes less supportive in the fourth quarter.

Singapore: October inflation data is due out at 1300 SGT today and will likely show the headline rate dropping below 2.0%, while the core rate eases a little lower from 2.8% in September. We don't expect the Monetayr Authority of Singpaore to softening inflation data until next year.

We look for gross domestic product growth in Canada to have picked up slightly to 0.2% in September on Friday after holding steady in August. That should leave the Q3 reading in line with our projection for a 1% annualized increase—slightly below the Bank of Canada’s 1.5% forecast and less than half the 2.1% rise in Q2.

Consumer spending likely increased in Q3 given a 5% (annualized rate) rise in retail sales, but a pullback in equipment imports is flagging a drop in business investment after a surprisingly large Q2 increase. A small pick-up in home resales in August and September likely drove residential investment higher in Q3, the first increase in four quarters.

The 0.2% increase we expect in September GDP is lower than Statistics Canada’s 0.3% advance estimate, with the rise partly due to the rail transportation bounce-back after disruptions in August. Wholesale and retail sale volumes rose in September, but manufacturing output likely contracted again, while hours worked fell 0.4% in September.

More importantly, the increase in Q3 GDP won’t prevent another contraction in real per-person activity, extending that downward trend for a sixth consecutive quarter. The soft growth backdrop and broadly easing inflation pressures are the main reasons our own base-case projections look for another 50 basis point rate cut from the Bank of Canada in December.

September’s GDP report will also include annual benchmark revisions with early estimates already suggesting that the level of GDP in 2023 was 1.3% higher than previously estimated. However, that is unlikely to change the broader trajectory for per-capita output, which has been persistently lower and consistent with a rising unemployment rate and slowing inflation pressures.

Weekly data watch

We expect U.S. personal spending to grow by 0.3% in October, down from the 0.5% in the prior month. Retail sales came in at 0.4% during that month, also grew at a slower pace than in September.

U.S. Personal income likely rose 0.3% in October. Disruptions from hurricanes and a large strike in the manufacturing sector paused job growth in October (+12k), but wages rose.
Job openings in the Canadian September SEPH data will be watched closely for signs of further softening in the labour market. Job openings have been declining, and we continue to expect wage growth to slow.

Source: ACTIONFOREX

Canada – Inflation Can’t ‘Shake it Off’

Taylor Swift may still be in Toronto, but it was the steady stream of economic data that dominated headlines this week. Canadian Consumer Price Index (CPI) inflation was supposed to be the star with a big upwards move in October (Chart 1), but the Federal government’s large pre-election stimulus to support consumer spending took center stage. Retail sales data for September also came in hot, showing that Canadian consumers may have entered a new ‘Era’ of elevated spending. Housing starts data also showed strength in October, likely reacting to the revival happening in the resale market. Financial markets responded by pricing a greater likelihood that the Bank of Canada (BoC) will revert to cutting by 25 bps at its December meeting.

A more gradual pace of interest rate cuts is consistent with October’s inflation data, which was a bit hotter than expected, bouncing back to target after a soft reading in September. And it wasn’t just higher gasoline prices behind the increase. The BoC’s core inflation measures also rose two tenths to 2.6% y/y on average, above the 2.5% mark the Bank had flagged in the past as behind the reason they were comfortable making a larger 50 basis point cut. This reminded markets that the BoC is not ‘Out of the Woods’ when it comes to controlling inflation.

Stronger consumer demand may be the source of rising inflation. After a long period of cautious spending, consumers are feeling ‘22’ again. It looks like the effect of lower rates is finally starting to raise sentiment. Retail sales data released Friday confirmed this, with a near 1% monthly jump in September and the advanced estimate for October showing more of the same. And this isn’t even including the rampant spending seen in Toronto over the last two weeks, where a flood of Swifties descended on the city to scoop up $100 shirts and T-Swift themed cocktails at local bars. The Federal government’s huge pre-election stimulus is likely to extend this spending spree through the first half of 2025, as the HST break and a round of $250 cheques will pull spending forward and boost overall GDP growth.

A stronger Canadian consumer also means that housing is back in ‘Style’. Lower rates have sparked the housing market, with resale activity and prices showing renewed strength ever since the BoC cut by 50 bps in October. This has parleyed into improved builder confidence, as housing starts data showed an impressive 8% monthly increase in October. This implies that residential investment should start being a positive contributor to Canadian GDP growth following three years of this sector dragging down growth.

If there was one T-Swift song that would characterize what the BoC should do, it’s: ‘You Need to Calm Down’ – with the pace of rate cuts that is. Everyone remembers the central bank electing to cut by an oversized 50 bps back in October. At the time, we made our own headlines by saying how this wasn’t needed and that it risked sparking the real estate market. This was the right advice, as the bank is looking increasingly likely to revert to its prior pace of 25 bps cuts. This may make it the ‘Anti-hero’ for those hoping for a Swifter pace of cuts, but it is likely the best course of action given the state of the economy.

U.S. – Looking Ahead After a Quiet Week

A brief rally in Treasuries fizzled out last week and, at the time of writing, Treasury yields are roughly back to where they were at Monday’s open. Ultimately, a pair of housing reports coming in roughly in line with expectations and two Fed speakers emphasizing data dependence, leave us looking to this week’s Personal Income and Outlays report as the next sign-post to gauge where the Fed’s rate cutting campaign is headed.

Two Fed Board Members took the stage last week – Governor’s Bowman and Cook. Though they offered slightly different interpretations of the state of the economy both recommitted to a data-dependent approach to rate setting. Governor Cook presented her view of the outlook, with an emphasis that the disinflation process is well on its way “even if the path is occasionally bumpy”. Governor Bowman was more pessimistic noting that, “progress on inflation seems to have stalled”. Markets now expect the Fed’s preferred inflation gauge (the personal consumption expenditure index excluding food and energy) to show another strong advanced in October of 0.3% month-on-month (m/m, 3.7% annualized) – well ahead of the Fed’s 2.0% target. Whether it’s a bump or another sign of stalling will come down to the details of the report.

The good news is that the growth in most goods and services prices has moderated significantly (Chart 1). Goods price trends have been a key part of the recent cooling with prices in both durables and nondurables in deflation over the past several months. There is some worry this benefit could be coming to an end as there was a notable uptick in durable goods prices last month (+0.3% m/m). With retail sales demand still healthy, another price gain can’t be ruled out. Adding to the concern is the prospect that tariffs are around the corner. For policymakers, the end of the downdraft from durable goods prices would come at an inopportune time as it has provided a meaningful deflationary offset to a still-hot housing sector.

This puts more focus on what kind of print we can expect in the coming months from the housing market. Sales activity clocked in a healthy gain last month amid lower mortgage rates in late summer. However, this is likely to be a temporary burst as affordability is still stretched, and the recent backup in borrowing costs should dent demand (Chart 2). With inventory levels near balanced territory, this should help temper further price gains.

To date, U.S. consumers have benefited from a productivity boom that has allowed inflation to cool without sacrificing much growth. The key concern now is whether this pace of productivity growth can extend into next year. This means looking at the details in the data for signs that demand growth is yet again outpacing supply. Markets currently judge the odds of a Fed cut in December at a coin toss. An upside surprise this week could make it a long-shot.

Source: ACTIONFOREX

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