Fed delivers 'hawkish' 50bp rate cut

In focus today

Today we will focus on multiple central bank monetary policy meetings.

Norges Bank (NB) will announce its rate decision at 10.00 CET followed by a press conference at 10.30 CET. We believe that NB will keep the policy rates unchanged, and signal that rates will be kept at that level for some time. We expect that the rate path in the monetary policy report will be adjusted downwards, signaling roughly a cut every quarter next year, significantly less than today's market price indicates, so a hawkish signal to markets.

In the UK, Bank of England (BoE) will announce its bank rate decision following the monetary policy meeting at 13.00 CET. We expect BoE to keep the bank rate unchanged at 5.00% in line with consensus and market pricing. In terms of communication, we anticipate BoE to stick to a cautious language and deliver a dovish twist to its communication. We expect a rather muted rection in EUR/GBP with risks tilted to the topside. Read more in Bank of England Preview - Proceeding with caution, 16 September.

We expect the Central Bank of Turkey to keep the policy rate unchanged today, in line with market consensus. The momentum in underlying inflation continued to accelerate in August. However, in our view this does not yet constitute a "significant and persistent deterioration in inflation" that is the CBRT's pre-condition for further policy tightening.

Early Friday, we will have a rate decision and August CPI print out of Japan. We expect no changes from the Bank of Japan following the hawkish turnaround at the late-July meeting. The bond market rally since then and cheaper oil prices have been a boon to JPY, which makes the initial motive for hiking rates less acute. We expect the next hike from the BoJ in December.

Regarding the CPI print, we previously got Tokyo CPI data indicating that price pressures picked up in August. Core inflation remains below 2%, though. The big question remains whether the recent recovery in purchasing power will support a pick-up in spending and push core inflation back above 2%.

Economic and market news

What happened yesterday

In the US, the Federal Reserve (Fed) decided to cut its target rate range by 50bp to 4.75-5.00%. This was a bigger cut than we expected. During this week markets gradually priced in a higher probability of the 50bp rate cut rather than the 25bp that we expected. The updated dot plot signals a total of 50bp of additional cuts for remainder of 2024 (so 25bp at each of the remaining meetings). For 2025, the Fed signals 4x25bp worth of additional cuts and 2x25bp also for 2026. We expect the Fed to ultimately deliver a faster and shorter cutting cycle than the 'dots' suggest. See Research US - Fed review: Going for the soft landing, 18 September.

The initial market reaction was for declining rates and weaker USD. However, the market reaction turned around and 10Y UST yields ended the session up by 6bp, while the 2Y tenor was close to unchanged. EUR/USD initially rallied towards 1.1190 following the 50bp rate cut but returned to around the 1.1120 mark after the press conference. USD strengthened further overnight where we briefly saw EUR/USD hit 1.070, but it is now back just below the 1.112 mark where it all started prior to the announcement.

In the euro area, the final HICP print confirmed the flash release at 2.2% y/y and core inflation at 2.8% y/y. Domestic inflation in the euro area measured by the ECB's 'LIMI' indicator declined to 4.22% y/y in August from 4.26% in July. With the August data we thus still see this very sticky domestic inflation with strong momentum.

In the UK, August CPIs were fully in line with consensus expectations; headline at 2.2% (prior: 2.2%), core at 3.6% (prior: 3.3%) and services at 5.6% (prior: 5.2%). Monthly pressures slightly higher in the core and service measure with upward contributions stemming from transport (air fares) and recreation and culture, explaining the slight move lower in EUR/GBP on the release. The print does not change our view of an unchanged decision from BoE later today.

Equities: Global equities were lower yesterday, but the movements were minor considering the stakes at the Federal Reserve meeting. Add to the puzzle the positive trends in Asia this morning and the markedly higher futures in Europe and the US. For those not following intraday movements, it is important to note that the initial equity market reaction to the policy statement was quite positive. It was not until after Powell's press conference that we observed a decline in equities. Without delving deeper into the details, the Fed managed to implement what we previously termed a semi-hawkish 50 basis point cut, without emphasizing the weakness in the labour markets too heavily. Although there was some divergence within sectors, it was minimal, and most notably, there was a slight outperformance in small caps. In the US yesterday, the indices closed as follows: Dow -0.3%, S&P 500 -0.3%, Nasdaq -0.3%, and Russell 2000 +0.04%. This morning, Asian markets are experiencing gains, led by a strong performance in Japan and a weakening yen. Futures in Europe and the US are also trending higher.

FI: Yesterday's 50bp rate cut 'surprise' from the Fed did not trigger significant volatility, as the central bank kept its guidance of a gradual return to normal. The initial market reaction to the rate cut announcement was a bullish steepening of the UST curve, but the move faded through the press conference as Powell struck a relatively upbeat tone on the economic outlook.

FX: The 50bp Fed cut initially led to a softer USD across the board, but most of the reactions reversed during Powell's press conference. GBP, NOK, CHF gained most against the USD in the G10 space, while EUR/USD remains more or less unchanged, just above the 1.11 mark. In the Scandies today's most important event is the Norges Bank meeting.