FOMC meeting takes the spotlight as markets anticipate a cut

In focus today

Today's main event will be the FOMC meeting, where we expect a 25bp rate cut. The cut is fully priced in, and markets have even speculated about the slim chance for a larger 50bp move. We will pay close attention to the Fed's updated rate projections, which could offer key insight into the Fed's preferred pace of easing over coming months - we still forecast only gradual cuts once per quarter.

The Bank of Canada is also expected to cut rates by 25bp to 2.50%.

In the euro area, the final HICP inflation print for August is expected to confirm the flash release, that showed headline inflation at 2.1% y/y and core inflation at 2.3% y/y.

In Sweden, the Labour Force Survey for August is published. The LFS unemployment rate is always volatile and especially so this year, due to higher-than-normal flows between active and inactive job seekers.

Ahead of tomorrow's Bank of England meeting, UK CPI data for August is released today. Core inflation was 3.8% in July and largely price pressures remain too high. PMI indices suggest price pressures remained elevated in August. Regardless, we expect Bank of England to stay on hold tomorrow.

Economic and market news

What happened overnight

In the US, President Trump announced a possible TikTok deal with China, which includes transfer of majority ownership to US owners. Trump extended the deadline for shutting down the app to 16 December, while the details are finalized.

In Japan, exports continued to decline as US tariffs weigh on the economy. August exports declined slightly by 0.1% y/y (cons: -1.9%) and imports declined by 5.2% y/y (cons: -4.2%). Notably, exports to the US declined by 13.8% y/y following last month's decline of 10.1%. The Japanese trade balance stayed in the negatives, albeit declined less than expected to JPY -242.5bn (cons: JPY 513.6bn) from JPY -117.5bn in July.

What happened yesterday

In Germany, the EU Commission approved Germany's substantial budget increase, despite it breaching the EU's fiscal rules. This marks a significant victory for Berlin and clears the way for notable investments in defence and infrastructure. Officials stated that Berlin's surge in public spending is temporary and does not pose a threat to its fiscal stability. The budget for 2026 now needs to be passed in parliament where the government has a majority. We expect the government to pass the draft budget in parliament, which should boost German GDP growth to 1.3% y/y in 2026 from 0.3% y/y in 2025.

The ZEW index for September shows increasing divergence between current growth and future expectations. The current situation assessment fell more than expected to -76.4 (cons: -73.6) from -68.6. This is the lowest level since May. In contrast, the expectations component for the economy rose unexpectedly to 37.3 (cons: 25.0) from 34.7. We will likely have to await the effects from fiscal easing to kick in before growth picks up as the private sector remains cautious.

In the Middle East, Israel launched a large ground assault on Gaza city. Bombardments have intensified as Israeli Defence Minister Israel Katz said, "Gaza is burning". The assault is in stark defiance of the European leaders who have threatened with sanctions. US President Trump continues to support Israel and invited Israeli Prime Minister Netanyahu to the White House in two weeks.

In the US, August retail sales came in stronger than expected and showed control group sales (the 'core' measure) growing 0.7% m/m SA (cons: 0.4%). Healthy wage growth appears to still be supporting consumption and consumer demand is still looking very healthy. Examining the details, particularly online sales grew strongly in August, which could reflect consumers' 'front-loading' purchases ahead of upcoming tariff-related price hikes.

In the UK, payrolls declined by 8K in August, while job creation was revised a bit higher over the recent months. Unemployment rate remained unchanged at 4.7% in July and wage growth with private sector ex-bonus declined slightly to 4.7% 3M/YoY from 4.8%. The data highlights the recent labour market cooling, albeit only gradually. In our perspective, more disinflation is needed to justify BoE cutting rates by more than market pricing.

Equities: Equities traded mostly lower yesterday. Europe underperformed the US, with Stoxx 600 -0.6% and S&P 500 -0.1%. This marked a reversal from recent sessions, as defensives outperformed while financials lagged. Tesla's rally extended, with the stock up 20% over the past five sessions on expectations of a sales rebound. Futures are flat this morning as markets await tonight's Fed decision.

FI and FX: EUR/USD pushed through 1.18 and reached a new four-year high, despite stronger-than-expected US retail sales, and the recent bout of dollar weakness is more likely a reflection of the positioning ahead of tonight's FOMC. Global yields showed more restraint, with yields declining somewhat across the curve led by the front end. USD/JPY slid to the lower end of the recent months' trading range around 146. In scandies, USD/NOK and USD/SEK both continued to descend into new lows, whereas the EUR-crosses saw minor upticks in line with general euro performance.