The main event this week is expected to be the FOMC meeting (Tue-Wed), where the start of the easing cycle is forecast to begin. Other central bank meetings include the BoE (Thu) and BoJ (Fri). Later today we have UK house prices and US empire manufacturing data prints later today. Tuesday’s main event will be the US retail sales figures, earlier we have Germany ZEW expectations. Eurozone and UK CPI, and US housing starts feature on Wednesday. The BoE meets on Thursday, markets will look for any indications on the QT strategy. Japan CPI and the BoJ’s rate decision and future rhetoric will keep markets busy on Friday morning.
Central bank chatter includes the ECB’s Panetta and Nahel on Monday. Vujcic and Holzmann speak at a conference on Wednesday. Knot and Schnabel follow on Wednesday at separate events. On Friday we will hear from Lagarde as she delivers the IMF’s Michel Camdessus Central Bank Lecture.
Markets witnessed mixed sentiment last week, as they digested US CPI and PPI data, and jobs reports. The yield on the US 10-year rallied 6bps to a new year-low of 3.65%, and the S&P Index rebounded +4.02%. Meanwhile, the dollar closed marginally lower, and oil rose 0.77%, to $71.61pb.
The US CPI report, the final one before next week’s FOMC meeting, gave markets plenty to consider. Both headline and core CPI matched expectations year-over-year at 2.5% and 3.2%, respectively. However, the slight uptick in August’s core CPI, combined with stronger real average earnings—hourly earnings up 1.3% YoY (previously 0.7%) and weekly earnings up 0.9% YoY (from 0.4%)— tempered market expectations for a rate cut this week. Next, August’s PPI data revealed a slower-than-anticipated annual growth in producer inflation, the headline print rose 1.7% YoY (est. 1.8%, prev. 2.1%). Core producer inflation, excluding volatile food and energy prices, also increased at a steady but slower rate of 2.4%, falling short of the 2.5% forecast. This deceleration in factory gate prices typically indicates weakening consumer spending, which has historically led to speculation about potential interest rate cuts by the Fed. Markets closed the week pricing in a 25bps cut this week and anticipate at least four rate cuts this year.
The ECB reduced interest rates for the second time this year, lowering the key deposit rate by 25bps to 3.5%, in line with expectations. President Lagarde emphasised a data-dependent approach, stating that future rate decisions are not predetermined. The ECB maintained its inflation projections for 2024-2026, expecting a decline towards the 2% target by 2025, despite anticipating a temporary rise in inflation later this year. Growth forecasts for 2024 were revised downward to 0.8%, reflecting weaker domestic demand. The ECB also decreased rates on main refinancing operations and marginal lending facilities to 3.65% and 3.90%, respectively. The broader message was that whilst acknowledging downside risks to economic growth, the ECB aims to moderate monetary policy restrictions whilst remaining vigilant about inflation trends. On Friday, the central bank’s President Lagarde said the ECB could cut again in October if the economy suffers a major setback.
Elsewhere, China’s economy is currently grappling with a complex set of challenges and opportunities. Recent data highlights a persistent imbalance between robust external demand and lacklustre domestic consumption. This disparity has begun to affect both households and businesses, casting doubt on the nation’s ability to achieve its ambitious 5% annual growth target. While exports, particularly to the EU, have shown encouraging growth, internal economic indicators paint a more sobering picture. Credit expansion has slowed markedly, as evidenced by the widening gap between M2 and M1 money supply growth. Retail sales, released over the weekend, have decelerated amidst rising unemployment, and fixed asset investment has waned, primarily due to a downturn in infrastructure spending. Nevertheless, there are glimmers of hope. The equipment manufacturing sector has emerged as a stabilising force, and government initiatives such as the ‘trade-in’ policy are yielding positive results. Moreover, accelerated government bond issuance is expected to bolster infrastructure projects in the coming months. Intriguingly, despite increased bond supply, yields on Chinese government bonds have continued to decline, with long-term rates reaching new lows for the year. This complex economic landscape underscores the delicate balancing act facing Chinese policymakers as they navigate the path to sustainable growth.
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