Weekly economic commentary: Central bank rate divergences are apparent again

Summary

United States: Recalibrating the monetary policy stance

• The commencement of monetary policy easing comes at a time when overall economic growth remains solid, supported by stronger-than-expected retail sales, industrial production and residential construction in August. Yet, signs of labor market weakness have posed meaningful threats to the sustainability of growth, which underpinned the FOMC's decision to start the easing cycle with a 50 bps cut, rather than a conventional 25 bps move.

• Next week: New Home Sales (Wed.), Durable Goods (Thu.), Pers. Income & Spending (Fri.)

International: Central bank rate divergences are apparent again

• Central banks were in the spotlight this week. Not just the Federal Reserve, but foreign central banks as well. Institutions across the advanced and emerging markets met to discuss and decide monetary policy settings.

• Next week: Eurozone PMIs (Mon.), Reserve Bank of Australia (Tue.), Bank of Mexico (Thu.)

Interest rate watch: An update to our Fed Funds forecast

• The Federal Open Market Committee (FOMC) opted to reduce the target range for the federal funds rate by 50 bps at its meeting this week. Based on what we know now, we believe the FOMC probably leans toward downshifting to a 25 bps pace going forward. Accordingly, we look for the FOMC to cut the federal funds rate by 25 bps at each of its two remaining meetings of the year.

Topic of the week: Mexico passes sweeping judicial reforms

• In Mexico, a constitutional amendment that calls for an overhaul of the country’s judicial branch passed through local congress, leaving market participants wondering what the financial, economic and governance-related implications may be. We remain cautiously optimistic on the prospects for Mexican financial markets and the peso for now, though we will be closely watching any developments with ratings agencies' assessment of the country's debt.

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