🔍 The focus this week: An ensemble cast of central banks

This week is a blockbuster one for central banks, with the Federal Reserve (Fed), the Bank of England (BoE), and the Bank of Japan (BoJ) all set to announce interest rate decisions, one after another.

The Fed has kept borrowing costs at a two-decade high for eight meetings in a row, but it’s widely expected to deliver its first rate cut in over four years on Wednesday. That comes as inflation in the US edges closer to its 2% target and the country’s labor market starts to show signs of weakness. Case in point: recent data showed that the pace of hiring over the past three months slowed to its lowest level since the early days of the pandemic.

The big question facing Fed policymakers now is whether a modest, 0.25 percentage point cut will be enough to stave off further damage to the labor market. While traders see a trim of that size as virtually certain this week, some are betting on a cut that’s twice as deep. And it’s not hard to understand their thinking. The Fed, after all, was widely criticized for moving too slowly to hike rates when the economy faced its worst bout of inflation in 40 years. And if it doesn’t respond swiftly to the faltering labor market, it could risk a further increase in the unemployment rate and a potential recession.

When it comes to the BoE and BoJ, traders widely expect both to stay put this week. Britain’s central bank lowered its key rate in a knife-edge vote in August, but it was quick to stipulate that the cut was not the start of a series. In contrast, the BoJ has been the only major central bank hiking interest rates, having done so twice this year. The latest one, a surprise move, sent shockwaves through financial markets. So the Bank is likely in no rush to rock that boat again.

📅 On the calendar

• Monday: Eurozone trade balance (July).
• Tuesday: China foreign direct investment (August), US retail sales (August), US industrial production (August).
• Wednesday: Japan trade balance (August), UK inflation (August), Fed interest rate announcement.
• Thursday: BoE interest rate announcement. Earnings: FedEx.
• Friday: BoJ interest rate announcement, Japan inflation (August), UK retail sales (August), eurozone consumer confidence (September).

👀 What you might’ve missed last week

US

• US inflation cooled slightly more than expected.

Europe

• The European Central Bank (ECB) cut interest rates.
• Britain’s economy stagnated for a second consecutive month.

Asia

• Consumer prices in China rose by less than expected.

✍️ What does all this mean?

There was good news and bad in the latest US inflation report. On one hand, consumer prices increased by just 2.5% in August from a year ago, one tick below what economists had forecast and a considerable step down from July’s 2.9% pace. On the other hand, core inflation – the measure that strips out volatile food and energy prices – unexpectedly accelerated to 0.3% on a month-over-month basis, driven by higher housing-related costs. And that suggests there are still some strong underlying price pressures in the economy.

The ECB cut interest rates for the second time this year, having shifted its focus from fighting inflation – which is within touching distance of its 2% target – to supporting the economy. The widely expected move took the bank’s key rate down to 3.5%, from 3.75%. And while the ECB didn’t say much about its next steps, traders are betting on at least one more cut this year.

After falling into a technical recession at the end of 2023, the British economy outpaced its Group of Seven peers in the first half of the year, expanding by 1.3%. But then things took a turn for the worse. Data last week showed the UK economy unexpectedly stagnated for the second consecutive month in July, thanks to heavy declines in manufacturing and construction. The flatline result disappointed analysts who had forecast a 0.2% increase.

Consumer prices in China increased by a meager 0.6% in August compared to the same period last year, even as food prices were pushed higher by bad weather. Meanwhile, core inflation, which excludes food and energy prices, came in at just 0.3% – the lowest in three years. The data added to worries that the world’s second-biggest economy might be heading toward a growth-damaging period of deflation (i.e. falling prices).