US
USD is consolidating this week’s losses and trading near the lows of the week. Global equity markets keep grinding higher while long-term sovereign bond yields remain under modest upside pressure. US 10-year Treasury yields are up nearly 10bps this month to 4.11%, mostly reflecting firmer inflation expectations. 10-year Treasury yields have been range-bound between 3.95%-4.20% over the past three months.
US weekly jobless claims confirm there is no layoff spiral underway. Initial claims for the week ended November 29 dropped to 191k (consensus: 220k) vs. 218k the previous week, just shy of the September 2022 record low of 189k.
Nevertheless, US labor demand is weak. Revelio labs non-farm employment (private and public) fell -9k in November vs. -15.4k in October. That data comes on the heels of a poor ADP print, which showed private sector employers shed -32k jobs in November. We see rising risk that the Fed front-loads rate cuts toward neutral levels (near 3%) to prevent the hiring slump from morphing into widespread firing. That can further weigh on USD.
The September Personal Consumption Expenditure (PCE) report is due today (3:00pm London, 10:00am New York). Headline and core PCE deflators are both expected at 2.8% y/y vs. 2.7% and 2.9% in August, respectively. While progress towards the Fed’s 2% inflation goal is stalling, upside risks to prices are not martializing, leaving room for the Fed to ease policy. The ISM prices paid indexes point to moderating inflation pressures.
Real personal spending and real personal income will also be in focus, offering insights into the underlying health of household consumption. Real personal spending is expected at 0.1% m/m vs. 0.4% in August. Rising job insecurity is likely to push households toward higher savings, restraining any meaningful pick-up in consumer spending. Moreover, muted real income growth is another headwind to consumer spending activity.
The December University of Michigan consumer sentiment survey will be released alongside the PCE report. The headline is expected at 52.0 vs. 51 in November, well below the long run average at 84.4. Watch the measures of inflation expectations to confirm that price pressures are easing.
CANADA
USD/CAD is trading heavy near 1.3940. Canada’s November labor force survey is up next (1:30pm London, 8:30am New York). The economy is expected to lose -2.5k jobs in November after surprising with strong gains of 66.6k and 60.4k in October and September, respectively. The Q3 business outlook survey indicates subdued hiring intentions over the next 12 months.
So long as labor weakness doesn’t deepen or widen, the Bank of Canada (BOC) is finished cutting. The swaps market implies steady rates at 2.25% over the next twelve months and a 25bps hike to 2.50% in the next two years. USD/CAD needs to sustain a break below its 200-day moving average (1.3913) to gain downside traction.
The upcoming review of the United States-Mexico-Canada trade agreement (USMCA) is an ongoing source of uncertainty and a downside risk to Canada’s economy. Businesses and consumers may be cautious as they wait for more clarity about the future of USMCA. The first six-year joint review of the USMCA is scheduled for July 1, 2026. President Donald Trump said yesterday “I‘ll either let it [USMCA] expire or we’ll maybe work out another deal with Mexico and Canada.” USMCA expires in 2036 unless the parties agree to extend it for another 16 years.
INDIA
USD/INR firmed back up to 90.0000, a touch below yesterday’s record high of 90.4248. The Reserve Bank of India (RBI) delivered on expectations and cut the policy rate 25bps cut to 5.25%. The RBI monetary policy committee unanimously backed the cut, stating “the benign inflation outlook… continues to provide the policy space to support the growth momentum.”
The swaps curve shows the policy rate has reached a floor at 5.25%, with rate hikes priced in over the next two years. The risk is the RBI eases again which is a drag for INR. India core inflation excluding gold is near the lower-end the RBI’s 2%-6% target range and tariff related developments are likely to decelerate growth in the coming quarters.
