Big week for central banks

We are heading into a busy week with major central bank decisions. The Federal Reserve (Fed), the Bank of England (BoE) and the Bank of Japan (BoJ) will announce their latest policy verdicts this week. The Brits and the Japanese are expected to remain seated on their hands and the Fed will certainly lower its rates this week. But by how much – is the million-dollar question!

A Fed rate cut is fully priced in, but investors can’t agree on the size of the cut that the Fed should deliver this week. Some – including myself – think that a 25bp cut would be appropriate to start cutting rates as inflation is cooling – but core inflation came in slightly higher than expected last week on a monthly basis. Corporate earnings last quarter were robust, growth in Magnificent 7 earnings slowed but remained very strong and the remaining S&P493 earnings growth turned positive for the first time since 2022. US GDP printed a 3% growth in Q2 and Atlanta Fed’s GDP Now forecasts suggests that the Q3 growth will likely be above 2%. The US labour market cools, but the cooldown doesn’t look alarming (alarming would be a series of NFP read between 50 and 100K and unemployment rate near 4.5%.)

But wagers for a 50bp cut are rising into Wednesday’s decision, as some investors think that the Fed should’ve cut rates already in July and that it may have fallen behind the curve by not doing so. Therefore, to make up for the delay, they should deliver a 50bp cut, otherwise the economic slowdown will accelerate and push the economy into a recession. I believe that if that’s the case, there is something that the Fed knows that we do not know.

Anyway, the second camp gained confidence late Friday and the probability of a 50bp cut outpaced the probability of a 25bp cut. The S&P500 closed the week a touch below its ATH level after recording a 4% rally over the week, Nasdaq 100 gained more than 6% last week, and the Dow Jones index rallied more than 2.5% and closed the week at a spitting distance from a ATH level, as well.

In the FX, the rising bets of a 50bp cut continues to weigh on the US treasury yields and the dollar. The 2-year yield is under pressure below the 3.60% level this morning, while the 10-year yield settles at 3.65% this morning. Gold closed last week at a fresh ATH and is pushing higher this morning in Asia, as the US dollar kicks off the week under a decent selling pressure. Bitcoin retreated during the weekend, even after an another assassination attempt on Trump during the weekend. The EURUSD flirts with the 1.11 mark, as the European Central Bank (ECB) didn’t want to commit to another rate cut at its policy meeting last Thursday. Cable, on the other hand, extends gains above the 1.31 level as the BoE is expected to maintain its rates unchanged when it meets this week as British policymakers made it clear at their last meeting – where they cut rates - that they are not planning to embark on a series of rate cuts. In Japan – on holiday today - the USDJPY fell to the lowest level since December despite the expectation that the BoJ won’t increase its rates this week. The BoJ is expected to wait until December, or January before delivering another hike. If that’s the case, the USDJPY’s destiny will remain in the hands of the Fed. If the Fed delivers a 50bp cut this week, we shall see the USDJPY move sustainably below the 140 level, but if the Fed is satisfied with a 25bp cut, the USDJPY should see support at the 140 level.

In energy, the week starts on a weak note. US crude tested but failed to clear the $70pb offers last Friday, and is under a decent selling pressure this morning due to another set of bad news from China. The latest data suggests that retail sales grew slower than expected in August, but more importantly, the industrial production grew slower-than-expected and home prices fell more rapidly despite the Chinese government’s efforts to stop bleeding. As Japan, China is closed for bank holiday today. But the HSI index is slightly lower this morning, while the CSI 300 sank to the lowest level since February last Friday.

Coming back to oil, crude oil continues to suffer from the Chinese weakness and even the rising bets of a 50bp cut from the Fed weren’t enough to send the price of a barrel of US crude above $70pb. Trend and momentum indicators remain comfortably negative, and the RSI index hints that oil is not in the oversold territory just yet, suggesting that we could see a further weakness in oil prices. Strong resistance is seen at $70/72pb range for US crude, and Brent crude – which closed last week at $72pb - could make another attempt below the $70pb mark.