UPCOMING EVENTS:
- Monday: New Zealand Services PMI.
- Tuesday: Eurozone ZEW, Canada CPI, US Retail Sales, US Industrial Production and Capacity Utilization, US NAHB Housing Market Index.
- Wednesday: UK CPI, US Housing Starts and Building Permits, BoC Summary of Deliberations, FOMC Policy Decision.
- Thursday: New Zealand Q2 GDP, Australia Labour Market report, BoE Policy Decision, US Jobless Claims.
- Friday: Japan CPI, PBoC LPR, BoJ Policy Decision, UK Retail Sales, Canada Retail Sales.
Tuesday
The Canadian CPI Y/Y is expected at 2.1% vs. 2.5% prior, while the M/M measure is seen at 0.0% vs. 0.4% prior. As always, focus will be on the underlying inflation measures. The Trimmed Mean CPI Y/Y is expected at 2.5% vs. 2.7% prior and the Median CPI Y/Y is seen at 2.3% vs. 2.4% prior.
The BoC is expected to cut rates by 25 bps at both the last two meetings left for this year, but there’s also a chance that the central bank delivers bigger rate cuts if growth and inflation were weaker than projected as Governor Macklem mentioned last week.
The US Retail Sales M/M is expected at 0.2% vs. 1.0% prior, while the Ex-Autos M/M measure is seen at 0.3% vs. 0.4% prior. The focus will be on the Control Group figure which is expected at 0.2% vs. 0.3% prior.
Consumer spending has been stable which is something you would expect given the positive real wage growth and resilient labour market. We’ve also been seeing a steady pickup in the UMich Consumer Sentiment which suggests that consumers’ financial situation is stable/improving.
Wednesday
The UK CPI Y/Y is expected at 2.2% vs. 2.2% prior, while the M/M measure is seen at 0.3% vs. -0.2% prior. The Core CPI Y/Y is expected at 3.5% vs. 3.3% prior, while the M/M figure is seen at 0.4% vs. 0.1% prior.
The market expects the BoE to keep rates unchanged at the upcoming meeting and then cut rates by 25 bps in November and December.
The consensus among economists sees the Fed cutting rates by 25 bps. The market pricing though is evenly split between a 25 and 50 bps cut. Some people say that starting with a standard 25 bps would be better because the economy is still fine, and 50 bps might be seen as panicky.
Central banking is also about risk management though. The market pricing is giving the Fed a nice opportunity to deliver a 50 bps “insurance cut” without surprising. Things would have been much different if we had something like 30% probabilities for a 50 bps cut and 70% for a 25 bps one.
The Fed didn’t have the chance to see the labour market report last July as the data was released two days later. Maybe, if they had the data a week earlier, we might have seen them cutting by 25 bps back then already and then continuing with 25 bps cuts for the subsequent meetings.
Fed Chair Powell made it clear at the Jackson Hole Symposium that they will not tolerate more labour market weakening and they will do everything they can to keep it strong. Considering everything, starting with a 50 bps cut makes much more sense.
The Fed can then show that it was just an insurance cut via its Summary of Economic Projections and Powell can double down on that at the Press Conference. Speaking of the SEP, the market is expecting the Fed to deliver at least 100 bps of easing by year-end. The Fed can cut by 50 bps and then project two more 25 bps cuts by year-end.
Further out, the market expects the Fed to deliver 150 bps of easing in 2025 which seems too aggressive at the moment. To sum up, I personally expect the Fed to cut rates by 50 bps, but in the end what’s important is that the Fed is finally starting to ease its policy and the magnitude will be shaped by the data in the next months.
Thursday
The Australian Labour Market report is expected to show 30.0K jobs added in August vs. 58.2K in July and the Unemployment Rate to remain unchanged at 4.2%. The market expects the RBA to deliver the first rate cut in February 2025, but the probabilities can be brought forward to December 2024 if the data were to disappoint in the next months.
The BoE is expected to keep rates unchanged at 5.00%. The expectations for such a move have been shaped by relatively strong data with PMIs firmly in expansion, inflation moderating at a slow pace and the unemployment rate ticking lower. The market then expects the central bank to cut by 25 bps in November and December.
The US Jobless Claims continues to be one of the most important releases to follow every week as it’s a timelier indicator on the state of the labour market.
Initial Claims remain inside the 200K-260K range created since 2022, while Continuing Claims have been on a sustained rise (although they’ve improved recently) showing that layoffs are not accelerating and remain at low levels while hiring is more subdued.
This week Initial Claims are expected at 230K vs. 230K prior, while there’s no consensus for Continuing Claims at the time of writing although the prior release showed an increase to 1850K.
Friday
The Japanese Core CPI Y/Y is expected at 2.8% vs. 2.7% prior. Inflation has been picking up alongside wage growth which are two of the most important factors for the BoJ. Nonetheless, the BoJ is expected to keep rates unchanged this time around and potentially deliver another rate hike by the end of the year.
The BoJ is expected to keep interest rates unchanged at 0.25%. The focus will be on the Press Conference as the markets will be attentive to signals or hints on the timing of the next rate hike.
Several BoJ officials kept the rate hikes on the table as they want to normalise policy to a more neutral stance. Markets instability has been a major concern for the central bank, so they will likely wait for the Fed to be a bit more down the road in its easing cycle before tightening policy further.
The PBoC is expected to keep the 1 year and 5 year LPR rates unchanged at 3.35% and 3.85% respectively. The Chinese economic data hasn’t been exactly good and deflationary risks remain high. Chinese officials should really go harder on monetary policy easing and bring real rates down from the current high levels.
