MNI Global Week Ahead: Fed Decision Headlines Busy Calendar

TUESDAY - Canada CPI

CPI for August on Tuesday is the focal point of the Canadian calendar although retail sales on Friday is increasingly of note with the BoC avidly watching for stronger economic growth to help limit the extent to which excess supply is building. Recall that the latest monthly GDP data pointed to softer momentum heading into Q3. The BoC’s preferred average of the trim and median measures has been particularly welcoming for the BoC in trend terms with a six-month run rate of just 2.2% annualized, firmly within the 1-3% target band. The three-month does sit a little higher at 2.7% and possibly saw only a slightly softer pace as of August judging by early analyst estimates. With 33bp of cuts priced for the October BoC decision, the data could help guide either towards a fourth consecutive 25bp cut or an acceleration in easing. That said, barring particularly large surprises, we see the report having less impact than usual. Despite regional differences, Wednesday's FOMC decision can have huge sway on the near-term outlook for Canadian monetary policy. We will also see the September labour and CPI reports before the BoC decision on Oct 23.

WEDNESDAY / THURSDAY - UK CPI and BOE Decision

It’s another big week for the UK with August inflation data on Wednesday, the MPC decision due to be published Thursday and retail sales on Friday. Inflation data surprised to the downside in July across both headline, core and services, all of which were driven by a reversal in accommodation prices (which had jumped in June). Outside of accommodation the data was broadly in line, setting the baseline for the September MPC meeting. At the time of writing, markets are pricing in around a 13% probability of a 25bp cut – with sequential cuts thereafter between November and May 2025 almost fully priced. There will be focus on any change in language (although not much is expected). The vote split will also be interesting with Dhingra widely expected to vote for a cut, potentially joined by Ramsden but other MPC members may prefer to wait until November. There is also a possibility that one or both of these members vote for rates on hold this month. A larger market reaction would likely be seen if there were more than two votes for a cut, however.

In addition to the Bank Rate decision, the MPC will make the annual decision on the pace of QT over the coming year (Oct ’24 - Sep ’25). The pace of active sales is widely (but not unanimously) expected to fall from the GBP50bln this year, but with GBP87bln of redemptions (up from GBP50bln this year), the market is uncertain how much sales will slow. The very loose early consensus looks for around a GBP100bln stock reduction (GBP13bln active gilt sales). We look for a higher GBP110bln stock reduction, but not that we have seen sellside estimates ranging from GBP87bln (ending active sales, but not reinvesting) to GBP137bln (keeping active sales at their current pace).

WEDNESDAY - Fed Decision

The Federal Reserve will cut the Fed funds rate for the first time in over 4 years on Wednesday Sept 18 – but the size of the initial reduction is in question as we head into meeting week. Participants’ communication prior to the pre-FOMC blackout period and the subsequent August CPI data appeared to cement a 25bp cut to 5.00-5.25%, but subsequent media reports that it’s a “close call” have pushed market pricing to imply a split decision vs a 50bp cut. Aside from the decision itself, the quarterly Dot Plot projections will provide a guide as to how quickly the FOMC envisages dialing back policy restriction. The median for expected total 2024 cuts is likely to come in at between 75bp (4.50-4.75%) and 125bp (4.00-4.25%), depending in part on how big the September cut is (vs just 25bp to 5.00-5.25% in the June projections). From there, the 2025 end-year median is likely to come in at either 3.00-3.25% or 3.25-3.50%, closer to neutral settings (vs 4.00-4.25% in the June projections). Expect Chair Powell to reiterate his Jackson Hole speech comments on the rising risks to the labor market warranting a removal of policy restriction. He is likely to emphasize that the Dot Plot is neither an official Committee forecast nor a pre-commitment, and that the FOMC will take a meeting-by-meeting, data-dependent approach on the size and pace of further cuts.

THURSDAY - Norges Bank Decision

The Norges Bank is unanimously expected to leave the policy rate on hold at 4.50%. The September meeting comes with an updated MPR and set of projections. We think there is scope for a small downward revision to the rate path, which could re-open the door to a rate cut in December of this year (after the June MPR rate path pushed the likelihood of the first rate cut into early 2025). However, we don’t expect the policy statement to see wholesale changes, because the primary guidance that “the policy rate will likely be kept at the current level for some time ahead” is still consistent with rates being cut in December, or a later date should Norges want to keep its stance hawkish.

FRIDAY - Japan CPI and BoJ Decision

The markets expect the National CPI to rise to 3.0% y/y for August in terms of the headline result. The prior outcome was 2.8%. Ex fresh food is projected at 2.8%y/y, versus 2.7% prior. The core ex fresh food, energy metric is forecast to tick back up to 2.0%y/y, from 1.9%. This would put it back at the BoJ's long term inflation target. In terms of the details it has been mixed. The Tokyo August CPI was stronger than expected, although this week's PPI showed slightly less than expected upstream price pressures. Recent wage gains may also feed into services inflation.

At its September 19-20 policy meeting, the Bank of Japan (BoJ) is expected to weigh whether gradual, timely interest rate hikes are necessary to avoid falling behind the curve and potentially facing steeper increases later. While the BoJ does not commit to a specific pace, policymakers may consider quarterly 0.25% rate hikes, aiming toward 1%, with the option to adjust depending on economic and price developments. The BoJ could accelerate tightening if data on capital investment and consumption, and a resilient US economy, support such a move. However, if higher rates begin to weigh on Japan’s economy or if the US enters a downturn, the BoJ may adopt a more cautious approach.