Will FOMC cut by 25 or 50bp?

In focus today

Today's main event will be the FOMC rate decision at 20:00 CET - we expect a 25bp cut of the Fed Funds Rate target (to 5.00-5.25%). This morning markets price in a 65% probability for an even bigger 50bp rate cut. Even though the Fed will now initiate its rate cutting cycle, we do not expect changes to the pace of QT. We expect the updated rate projections to signal a total of 3x25bp rate cuts in 2024 (prev. 1) followed by 6x25bp cuts in 2025 (prev. 4). See Research US - Fed preview: Dovish 25bp, 13 September.

In the euro area, we receive the final inflation data for August. The release will allow us to investigate the inflation drivers in August and we particularly look out for the 'LIMI' indicator of domestic inflation. Recently, domestic inflation has remained high and is a key reason we expect only a gradual cutting approach from the ECB. 

From Sweden, August LFS is out this morning, expected to show a slight increase in seasonally adjusted unemployment to 8.5%. More interesting however is to gauge the developments in employment and hours worked as these give clues to household income growth and production activity. Both these factors surprisingly dropped in July, but we expect a bounce back now.

Economic and market news

What happened yesterday

In the US, retail sales increased by 0.1% (prior: 1.0%, consensus: -0.2%) in August, so a slight increase instead of a slight decrease. This signals that consumer spending remains stable. Industrial production came in stronger than expected at 0.8% (prior: -0.9%, consensus: 0.2%). We do not expect these numbers to affect the rate decision today, where our base case is a 25 bp rate cut, as stated above.

In Germany, the ZEW index declined more than expected in September. The expectations component plunged to the lowest level in a year while the assessment of the current situation component fell to the lowest level since Covid. The assessment of the current situation has been stuck at very low levels during the past year and the expectations component has now fallen in the past three months following a strong rebound in spring.

In Canada, consumer prices rose 2.0% y/y in August (prior: 2.5%, consensus: 2.1%), and fell by 0.2% m/m (prior: 0.4%, consensus: unchanged). The weaker than expected inflation print has led to some market speculation that the Bank of Canada (BoC) could be in for a 50bp rate cut at the October meeting. At the monetary policy announcement earlier this month BoC governor Macklem said that the central bank must increasingly gauge against the potential of inflation falling below target due to weak economic growth. Markets still price in biggest probability for a 25bp cut, but the probability of a 50bp rate cut rose from 46% to around 47.5% after the release.

Equities: Global equities were fractionally higher yesterday yet remained in a state of wait-and-see ahead of tonight's highly anticipated FOMC meeting. Despite this, the sentiment leading up to the FOMC meeting has been positive, with the S&P 500 surpassing its mid-July peak. Yesterday also saw a decent cyclical outperformance, bolstered by a positive reception to a potential 50bp cut as small caps outshone others. In the US yesterday, Dow -0.04%, S&P 500 +0.03%, Nasdaq +0.2% and Russell 2000 +0.7%. Asian markets were mixed this morning, with Japan making up some of yesterday's losses. US futures were marginally higher, while European futures edged lower.

FI: The main event today is the FOMC meeting tonight to see whether the Federal Reserve will cut by 25bp or 50bp as well as the comments regarding future monetary policy. The market is divided between a 25bp or 50bp rate cut, as there are pros and cons for both a 25bp or 50bp rate cut. We believe it will be a 25bp cut, but a positive market reaction depends on the comments after the meeting. If the Federal Reserve cuts "only" by 25p it is expected that they will strike a dovish tone afterwards.

FX: Yesterday's session was generally muted, with no notable moves in the G10 space, as markets await the crucial FOMC meeting today. The USD strengthened slightly, with EUR/USD remaining just above 1.11, while USD/JPY drifted back above 142. Scandies were little changed, with EUR/NOK just below 11.80 and EUR/SEK just above 11.30. Markets are clearly waiting for the FOMC decision, which could potentially set the near-term tone for various crosses and overall risk sentiment.