Dollar recoups more losses after better ISM services index
S&P 500 extends its losing streak to four sessions
Bank of Canada decides on interest rates
Is the dollar making a comeback?
The US dollar outperformed most of its major peers on Tuesday and continued to trade higher today. With no clear catalyst to boost the dollar yesterday, this suggests that there was fuel left in its tanks from Monday, when the US ISM services PMI showed further improvement in November and pointed to stubbornly elevated cost pressures for services firms.
Coming on top of an employment report revealing accelerating wages during the month, this may have raised fears of a potential rebound in inflation in the months ahead, which could prompt the Fed to act somewhat more aggressively. Indeed, market participants are now expecting a terminal rate of around 4.96%, while ahead of the release they were seeing a peak at around 4.92%. Nonetheless, they are still pricing in nearly two quarter-point rate cuts by the end of next year.
Further data adding to the narrative of higher interest rates in the US could continue to support the US dollar for a while longer. Even in the opposite case, where economic releases point to an economy heading into recession faster than previously estimated, they could prove supportive for the currency through safe-haven inflows. However, increasing fears of a recession are likely to allow market participants to maintain the view that the Fed may need to cut sooner rather than later to treat the economic wounds. Therefore, whether any further strength in the US dollar will result in the resumption of its prevailing uptrend and take it to new multi-decade highs remains a mystery.
For now, how the greenback will perform at the turn of the year may depend on the US CPI data for November, scheduled to be released next Tuesday, and the FOMC decision just the next day. Another slowdown in consumer prices and a median dot for 2023 lower than the terminal rate estimated by the market could very well enhance speculation about rate cuts towards the end of next year, and thereby bring the US dollar under renewed selling interest. On the other hand, a rebound in the CPI could help it recoup some more of its latest losses.
Stocks extend slide on slightly adjusted Fed bets
The stock market extended its slide yesterday, with the S&P 500 trading in the red for the fourth consecutive session. Once again, market participants decided to sell stocks near the downtrend line drawn from the index’s all-time high back in April.
The better-than-expected ISM services index adds credence to the notion that “positive data is bad for stocks and bad data is good” and that’s why equities may continue pulling back in case data continues to support the narrative that the Fed may eventually need to raise rates higher. Flipping the coin, weak numbers could result in another round of support but if they start pointing to a more serious deterioration in the economic outlook, the inverse correlation is unlikely to last very long as a damaged economy is far from a positive development for the stock market. That may not take long to occur as major commercial banks have started ringing louder alarm bells. Bank of America’s chief executive predicted three quarters of slightly negative growth in 2023, while JPMorgan’s CEO said that a mild to more pronounced recession is likely.
Ergo, the chances for stocks to deepen their losses are greater than those for the dollar being able to resume its uptrend as the Fed is seen cutting rates should fears of a recession materialize.
Will the Bank of Canada go for a 25bps hike?
Today, the spotlight is likely to fall on the Bank of Canada decision, with most market participants holding the view that policymakers will deliver a dialed-down 25bps hike, despite data suggesting that the domestic economy is doing fine. Specifically, they are assigning a 65% probability for such an action, with the remaining 35% pointing to 50bps.
Perhaps market participants believe that the impact of the already-delivered hikes has not been fully felt yet, while remaining concerned about a housing bubble and oil demand by China. Canada is the world’s fourth largest oil exporter and demand complications deriving from the world’s second largest economy and top crude importer could well upset growth prospects.
Although there are hopes that China will slowly exit its zero-COVID policy, it may take some time before the engines of the world’s second largest economy restart. What’s more, it remains to be seen what kind of impact the price cap on Russia’s exports will have on oil prices. Thus, all this uncertainty may indeed prompt BoC policymakers to hike by only 25bps today.