Weekly focus: Fed initiating the easing cycle with 50bp cut
|The main event this week was the monetary policy meeting in the US where markets prior to the meeting were historically divided between a 25bp and 50bp cut. The Federal Reserve chose to lower the policy rate by 50bp to a new target range of 4.75-5.00%. The larger move was motivated by a significant shift in the Fed’s risk assessment. 12 out of 18 participants saw risks to unemployment rate tilted to the upside (prev. 4 participants), and the median unemployment rate forecast was revised up through 2024-2026. Despite this, Powell downplayed the probability of a recession during the press conference, as faster rate cuts are set to support growth. The updated dots signal a total of 50bp of additional cuts in 2024, 4x25bp of cuts in 2025 and 2x25bp cuts in 2026. Hence, the Fed signals a longer but more gradual rate cutting cycle compared to our call of 25bp cuts in every meeting until June, leaving a terminal rate at 3.00-3.25% by end of 2025.
This week, we also had monetary policy meetings in the UK, Japan, and Norway (see p. 4). In UK, the Bank of England left the policy rate unchanged at 5.0%. The vote-split revealed 8 members voting for an unchanged rate and one in favour of a 25bp cut. We expect the next rate cut in November and a pause in December before a pick-up in cutting pace in 2025. In Japan, the BoJ kept the policy rate unchanged as widely expected. As growth and inflation has picked up, we expect the next rate hike in December.
China released their monthly batch of data for a wide range of areas. The data painted a picture of an economy that lost even further momentum in August. The weak Chinese demand is contributing to the downward pressure on global commodity prices as well as Chinese export prices leaving China as a key disinflationary force in the world. China is also weighing on the recent weak global manufacturing growth.
In Europe, domestic inflation remains strong while growth momentum weakened. The final euro area inflation data showed that the ‘LIMI’ measure of domestic inflation declined to 4.2% y/y from 4.3% y/y in July. Momentum eased but the high yearly growth rate favours a cautious easing approach of the ECB. The German ZEW survey showed the weakest assessment of the economic situation since Covid, and expectations declined to a year-low, highlighting the fragility of the German economy.
Next week focus will be on September PMIs from the US and the euro area. On both sides of the Atlantic, we expect the weakness in manufacturing to continue and services holding up activity. Services PMIs will likely decline in the euro area as the boost from the Olympic games recorded in August fades, but excluding this growth momentum was likely unchanged. On the central bank front, we follow a long list of Fed speakers including Powell on Thursday and rate decisions in China, Australia, and China. We expect the Chinese central bank to ease policy to stimulate the weak economy while the RBA is expected to leave the policy rate unchanged. In Switzerland, we expect the SNB to lower the policy rate by 25bp to 1.0%.
On Friday, we receive the US PCE inflation measure and inflation data from Spain and France ahead of the euro area print. We expect energy prices to pull euro area inflation significantly down to 1.8% y/y while core should remain unchanged at 2.8% y/y (0.20% m/m s.a.) due to sticky services inflation. In Japan, we follow the vote for a new leader and thus prime minister of the ruling party, as it could influence financial markets.
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