First light news: Busy week of central bank announcements ahead

Fed poised to pull the trigger this week

Against a backdrop of sticky price pressures, a weakening jobs market, and resilient growth (albeit slowing), the week’s key macro driver is the Fed’s rate decision on Wednesday. Despite some desks discussing the possibility of a 50-bp rate reduction, the Fed is widely expected to cut its target rate by 25 bps. While economic data has notably softened, I do not think it warrants a 50-bp move. 

Consequently, the question is not whether they will reduce rates, but rather the pace at which they will loosen policy going forward. Therefore, messaging about returning to neutral in the accompanying rate statement and press conference, as well as the quarterly SEP, will be closely watched.

You will recall that in the previous SEP in June, the Fed projected two rate cuts this year. However, markets are currently pricing in nearly three rate reductions (-70 bps). So, if the Fed’s projections demonstrate a slower pace of cutting than the market is forecasting, this could open the door for a hawkish surprise (USD/yields higher – equities lower). Additionally, market positioning (CoT data) shows the USD is somewhat stretched to the downside, potentially adding fuel to any upward surprise. 

Another worthwhile data point to watch this week is US initial jobless claims for the week ending 13 September, following the upward surprise of 263,000 in the week prior (from 236,000), which essentially matched highs seen in mid-2023. Although economists expect the report to show a pullback to 241,000, an upward surprise here, particularly if we see another cycle high, could validate fears of accelerating labour market weakness. Conversely, a sharp reversal would ease recession concerns and potentially bolster the USD.

Busy week for central banks

The BoC makes the airwaves on Wednesday, with investors assigning a 90% probability of a 25-bp cut as unemployment reached 7.1% in August, marking its highest level since 2021. You will also note that nearly 65,000 jobs were lost in August, followed by 41,000 in July, which, in my opinion, has overshadowed sticky price pressures (the BoC’s core measures remain around the central bank’s upper 3.0% band). Therefore, if the BoC holds rates this week, it could see a notable bid in the CAD. 

Thursday welcomes the BoE, which is widely expected (98%) to hold the bank rate unchanged at 4.00% in a 7-2 MPC vote. To be frank, I don’t see much that could be traded from this announcement. Friday also features a rate announcement from the BoJ, which is expected to remain unchanged at 0.50%.