“The time has come” for Fed interest rate cuts and the time has also come for the FOMC to pull the trigger on either a 25bps or a 50bps move. Wednesday’s decision will be the first time in four years that policymakers have reduced borrowing costs. Their aim is to achieve the widely hoped for “soft landing” of not too fast and not too slow economic growth and subdued inflation. That likely calls for slow and shallow rate cuts, in quarter-point reductions, even though markets are back to a coin flip regarding 25 or 50.

That is due to recent media reports that the Fed is “wrestling” with how aggressively to cut rates. The Fed is now focused on the labour market, which has weakened since July when officials were actually much closer to cutting rates than most perhaps appreciated. That means a smaller quarter point move will disappoint investors hoping for deeper, faster cuts potentially supporting higher equity valuations. That would help the dollar, but much will depend on the fresh summary of economic projections, as well as the dot plot. Wrap that up with Powell’s press conference and it should certainly be volatile with possibly whippy price action.

The Bank of England is expected to stand pat on rates, so not following the plethora of other central bank easing policy again. It is highly doubtful that officials move in a more dovish direction just yet as sticky services inflation and a relatively solid economy give rate setters on the MPC some time to see how the data evolves. Those reasons are behind sterling remaining the leading major currency against the dollar this year. This may not change until lower prices and wage expectations feed into the official figures. We do get inflation data published the day before the BoE meeting. The bank is braced for services CPI to rise in the coming months before falling back into year-end.

In Brief: major data releases of the week

Tuesday, 17 September 2024

– US Retail Sales: Consensus sees August activity rising 0.1% and ex-autos 0.3%. This is slower than the prior month which showed that consumers are maintaining spending by bargain hunting and trading down to lower-prices subsidies.   

Wednesday, 18 September 2024

– UK CPI: The headline is forecast to remain at 2.2% y/y and core to rise two-tenths to 3.5% y/y. Key services inflation is expected to increase to 5.6% from 5.2%. Big base effects are said to be responsible for the upticks, with hotel prices continuing to add volatility.     

– FOMC Meeting: The time has come for rate cuts as policy is too restrictive. But markets see it as a toss-up between a 25bps or a 50bps move. Consensus sides with a quarter point reduction due to the recent labour market and core CPI data. The Fed updates its quarterly projections and dot plot.

Thursday, 19 September 2024

– Australia Jobs: The headline is seen at 30k, a return to trend after several months of stronger-than-expected gains. The unemployment rate is forecast to remain at 4.2%, as labour supply continues to outpace demand. Rising unemployment driven by higher participation is less concerning than job losses.

– Bank of England Meeting: Expectations are for rates to remain unchanged at 5% with a 7-2 vote split. There is no press conference or new forecasts. Elevated services inflation is the main concern for the MPC. GDP is expected around 0.3% in Q3 with PMIs still in expansionary territory.

Friday, 20 September 2024

– Bank of Japan Meeting: The BOJ is widely expected to keep rates steady after their 15bp rate hike in July. If incoming inflation and growth data print in line with the bank’s outlook, the next rate rise is likely to be in December.

– UK Retail Sales: The headline reading is forecast to fall two-tenths to 0.3% with the annual print steady at 1.4%. Better weather and marginally more positive consumer confidence may help activity. But a challenging environment is expected into 2025.