Weekly Market Outlook (16-20 September)

Upcoming Events:

• Monday: New Zealand Services PMI.
• Tuesday: Eurozone ZEW Index, Canadian CPI, US Retail Sales, US Industrial Production and Capacity Utilization, US National Association of Home Builders Housing Market Index.
• WednesdayUK CPI, US Housing Starts and Building Permits, Bank of Canada Minutes, FOMC Policy Decision.
• Thursday:New Zealand Q2 GDP, Australian Labor Market Report, Bank of England Policy Decision, US Jobless Claims.
• Friday:Japan CPI, People’s Bank of China Personal Loan Rate, Bank of Japan Policy Decision, UK Retail Sales, Canada Retail Sales.

Tuesday

Canada’s Consumer Price Index (CPI) is expected to come in at 2.1% YoY versus 2.5% previously, while the monthly measure is expected at 0.0% versus 0.4% previously. As always, the focus will be on core inflation measures. The average y/y CPI is expected at 2.5% versus 2.7% previously, and the average y/y CPI is expected at 2.3% versus 2.4% previously.

The Bank of Canada is expected to cut interest rates by 25 basis points in the last two meetings remaining this year, but there is also a chance that the central bank could make even bigger rate cuts if growth and inflation are weaker than expected, as Governor Macklem said last week.

US retail sales are forecast to come in at 0.2% m/m vs. 1.0% previously, while auto sales are forecast to come in at 0.3% m/m vs. 0.4% previously. Focus will be on the control group figure, which is forecast to come in at 0.2% vs. 0.3% previously.

Consumer spending was stable, as expected given positive real wage growth and a resilient labor market. We also saw a steady rebound in the University of Michigan Consumer Confidence Index, suggesting that consumers’ financial situation is stable/improving.

Wednesday

UK CPI is expected to come in at 2.2% YoY vs 2.2% previously, while the monthly figure is expected at 0.3% vs -0.2% previously. Core CPI is expected at 3.5% YoY vs 3.3% previously, while the monthly figure is expected at 0.4% vs 0.1% previously.

The market expects the Bank of England to keep interest rates unchanged at the next meeting and then cut them by 25 basis points in November and December.

Economists agree that the Fed will cut rates by 25 basis points. But the market pricing is evenly split between a 25- and 50-basis-point cut. Some say that starting with a record 25-basis-point cut would be better because the economy is still doing well, and a 50-basis-point cut might be seen as panic.

But central banks are also about managing risk. Market pricing gives the Fed a good chance of cutting rates by 50 basis points without surprising anyone. Things would be very different if the odds of a 50 basis point cut were 30% and the odds of a 25 basis point cut were 70%.

The Fed didn’t get a chance to see the July labor market report, as the data was released two days later. Had the data been available a week earlier, we might have seen it cut rates by 25 basis points already then, and then continue to cut rates by 25 basis points at subsequent meetings.

Fed Chairman Powell made clear at the Jackson Hole symposium that they will not tolerate further weakness in the labor market and will do everything they can to keep it strong. All things considered, starting with a 50 basis point rate cut makes more sense.

Then, the Fed could show that the rate cut was just an insurance cut through its Economic Outlook, and Powell could confirm that at the press conference. In the Economic Outlook, the market expects the Fed to deliver at least 100 basis points of easing by the end of the year. The Fed could cut rates by 50 basis points and then expect two more 25 basis point cuts by the end of the year.

In the near future, the market is expecting the Fed to cut rates by 150 basis points in 2025, which seems very aggressive at the moment. In short, I personally expect the Fed to cut rates by 50 basis points, but in the end, what matters is that the Fed has finally started to ease its policy, and the size of this move will be determined by the data in the coming months.

Thursday

The Australian labour market report is expected to show 30.0k jobs added in August versus 58.2k in July and the unemployment rate is expected to remain unchanged at 4.2%. The market is expecting the RBA to deliver its first rate cut in February 2025, but the odds could be pushed forward to December 2024 if data disappoints in the coming months.

The Bank of England is expected to keep interest rates unchanged at 5.00%. Expectations for such a move have been built on relatively strong data with PMIs expanding steadily, inflation slowing at a slow pace and unemployment falling. The central bank is expected to cut interest rates by 25 basis points in November and December.

US unemployment claims remain one of the most important data to follow each week, as they are a more accurate indicator of the state of the labor market.

Initial claims remain within the 200K to 260K range that has been established since 2022, while continuing claims have been on a steady rise (although they have improved recently), indicating that layoffs are not accelerating and remain at low levels while hiring is more subdued.

Initial claims this week are expected to come in at 230k vs 230k previously, while there is no consensus on continuing claims at the time of writing although the previous release showed an increase to 1,850k.

Friday

Japan’s core CPI is expected to come in at 2.8% y/y versus 2.7% previously. Inflation has been rising along with wage growth, two of the most important factors for the Bank of Japan. However, the BOJ is expected to keep interest rates unchanged this time and could raise rates again by the end of the year.

The Bank of Japan is expected to keep interest rates unchanged at 0.25%. Attention will be focused on the press conference as markets will be looking for clues or hints on the timing of the next rate hike.

Many Bank of Japan officials have kept interest rate hikes on the table as they seek to normalize policy to a more neutral stance. Market instability has been a major concern for the central bank, so it is likely to wait until the Fed is a little further along in its easing cycle before tightening policy further.

The People’s Bank of China is expected to keep the one-year and five-year lending rates unchanged at 3.35% and 3.85%, respectively. China’s economic data has not been all that good, and deflationary risks remain high. Chinese officials need to do more to ease monetary policy and bring real interest rates down from their current high levels.