Markets brace for a Fed rate cut

In focus this week

Multiple central bank rate decisions are on the agenda, with notably the FOMC meeting and Bank of Canada (BoC) on Wednesday, the Bank of England (BoE) and Norges Bank (NB) on Thursday, and the Bank of Japan (BoJ) on Friday. The FOMC, BoC and NB are expected to deliver a 25bp cut, while we anticipate that both the BoE and BoJ will keep rates unchanged. Regarding the details, the market will be closely watching the Federal Reserve's updated rate projections for clues on the pace of future easing.

Economic and market news

What happened overnight

In China, the monthly data package showed a further weakening of the economy in August across the board. Both consumption and housing moved a notch lower again with retail sales falling from 3.7% y/y to 3.4% y/y (cons 3.8%) and new home prices down 0.3% m/m following -0.31% m/m in July. Industrial production weakened as well, falling from 5.7% y/y to 5.2% y/y (consensus 5.6%). Investment growth also dropped, and unemployment moved higher. The data should ring some alarm bells in Beijing and, as we saw last autumn, pave the way for stronger stimulus signals soon. The weak demand situation contrasts with the strong development in the tech space, which has supported this year's equity rally. The market reaction has been muted with offshore equities actually slightly higher overnight and USD/CNH lower from 7.1275 to around 7.12. Markets are likely betting on stronger stimulus soon.

What happened over the weekend

In the euro area, the credit rating agency Fitch downgraded France to A+ from AA- citing political instability and rising debt. While we initially believed that France would be downgraded, the formation of a new government earlier this week led to speculation that Fitch might postpone the "inevitable". Prime Minister Lecornu is grappling with the challenge of implementing the spending cuts demanded by impatient investors, while simultaneously attempting to secure support from three ideologically diverse parliamentary blocs with conflicting approaches to budget reductions.

In the US, the University of Michigan's preliminary September consumer sentiment survey reported 1-year inflation expectations remaining elevated at 4.8%, while 5-year expectations rose to 3.9% from 3.5% in August. Both figures remain above the Federal Reserve's target. Although the market reaction was rather muted, we think this presents a compelling argument for a more gradual rate-cutting cycle rather than back-to-back cuts.

In the UK, GDP was unchanged in July compared to June, leaving y/y growth at 1.4% and slightly weaker than market expectations. Manufacturing output declined 1.3% m/m while services improved slightly, thus largely confirming the story from PMI data as well.

Equities: Equities were little changed on Friday. In the US, performance was supported by last week's decline in yields, which continued to fuel gains in big tech. The "Magnificent Seven" stocks rose another 1-2% on a light news flow, while Tesla advanced 7%. The S&P 500 and Stoxx 600 finished the day flat, whereas the Nasdaq gained 0.4%, closing at a fresh all-time high. Today's session also looks quiet, with futures little changed this morning. This still wraps up a strong week for equities, with US indices up 1.5% and Europe 1%. Importantly, the recent defensive rebound - led by healthcare - has stalled.

While focus often falls on the US when lower rates spark tech rallies, the impact has been even more pronounced in emerging markets. Korea's Kospi surged an impressive 7% last week, and China's Shenzhen index has climbed nearly 30% over the past three months. This strength comes despite signs that China's credit impulse and macro momentum have rolled over in past months. Like in the US, the link between broad macro fundamentals and equity prices appears to be breaking down due to AI.

FI and FX: A quiet end to a rather busy week as we saw global yields drifting slightly higher on Friday, with modest curve steepening on both sides of the Atlantic. For the week ahead, focus will be on no less than four G10 central bank meetings: the Fed, Bank of England, Bank of Japan and Norges Bank. In FX space, the USD closed the week on a weaker footing, with EUR/USD moving back above 1.1730. Scandies had a strong week, where especially the NOK stood out with EUR/NOK closing the week some 20 figures lower and NOK/SEK edging higher towards the 200dma at 0.9510.