Next week, the key event in the US will be the Federal Reserve meeting. According to National Bank of Canada analysts, the FOMC will cut rates and the question is by how much. 

Key Quotes:

“In the U.S., the Federal Reserve will cut benchmark rates this week, the question is by how much. St. Louis Fed President James Bullard has recently argued in favor of a 50-basis point cut and there is indeed an argument to be made in favour of such a policy path. Trade uncertainties are still very much an issue and, judging from the latest ISM report, factory conditions are now deteriorating.”

“The key going forward will be to see whether the slowdown in manufacturing spreads to other sectors of the economy. As of now, the labour market remains sufficiently strong to accommodate new entrants to the labour force and support healthy consumer spending. Inflation, meanwhile, is trending up towards target. On the financial front, new issuance of corporate bonds has been on fire lately and stock indices stand near all-time highs.”

“In our opinion, it would be difficult for the Fed to justify a 50-basis point move in such an environment, especially given that trade talks between the U.S. and China are set to resume in October. We are therefore calling for a 25-bps cut on Wednesday to be followed by another similarly-sized move before the end of the year.”

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