A Jumbo Rate Cut is About to Get Validation

The Federal Reserve’s preferred inflation measure and consumer demand data are expected to support the central bank's recent decision to cut interest rates while affirming Chair Jerome Powell's assertion that the U.S. economy remains robust. Economists predict that the personal consumption expenditures (PCE) price index will increase by a modest 0.1% in August, repeating a similar rise seen two months prior. On an annual basis, the inflation gauge is anticipated to have climbed by 2.3%, the smallest yearly increase since early 2021, but still slightly above the Fed’s 2% target.

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The deceleration in inflation can be attributed to several factors, including declining energy costs, lower food prices, and easing core inflationary pressures. Economists expect that the PCE price index, excluding volatile components such as food and fuel, will show a 0.2% rise for the third consecutive month when government data is released.

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This decline in inflation compared to earlier in the year gave the Federal Reserve the confidence to implement a 0.5% rate cut on September 18, marking the first reduction in over four years. The move signaled a shift in the Fed’s approach, as policymakers sought to prevent a potential downturn in the labor market.

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As markets await further developments, investors will closely scrutinize comments from a number of Fed officials in the coming days. Governors Michelle Bowman, Adriana Kugler, and Lisa Cook, along with regional Fed presidents Raphael Bostic and Austan Goolsbee, are scheduled to speak at various events. Their remarks will likely provide insights into the Fed’s future policy direction, especially in light of the recent rate cut.

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The August inflation figures will be accompanied by data on personal spending and income, with economists expecting continued strength in household expenditures. Steady growth in consumer spending raises the likelihood of sustained economic expansion, a key factor in maintaining optimism about the overall economy.

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Other important economic indicators set to be released include new-home sales for August, second-quarter gross domestic product (GDP) figures, along with annual GDP revisions dating back to 2019, weekly jobless claims, and August orders for durable goods. These data points will offer further clarity on the health of the U.S. economy.

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In Canada, the outlook is less positive. GDP data for July and a preliminary estimate for August are expected to reveal sluggish growth, likely falling short of the Bank of Canada’s forecast of a 2.8% annualized increase for the third quarter. Central bank governor Tiff Macklem is also scheduled to deliver remarks at a banking conference in Toronto, where he may address the country’s economic challenges.

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Elsewhere in the world, the Organization for Economic Cooperation and Development (OECD) will release new economic forecasts, while central banks in Switzerland and Sweden may announce interest rate cuts. The Reserve Bank of Australia, meanwhile, is expected to maintain its current cash rate target of 4.35% at its meeting on Tuesday. The focus will be on whether Governor Michele Bullock continues to take a hawkish stance following strong labor market data, which has led traders to reduce their expectations of a December rate cut.

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Bloomberg Economics still sees a potential path to easing by the Reserve Bank of Australia in the fourth quarter, although authorities will have to wait until Wednesday to see if Australian inflation has cooled for the third consecutive month. Australian Treasurer Jim Chalmers expressed optimism that upcoming data will show progress in combating inflation, though he acknowledged that the central bank might not be ready to cut rates yet.

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Other countries in the Asia-Pacific region, such as Malaysia and Singapore, are expected to release inflation data for August, with forecasts suggesting that price growth has slowed. Japan will also release fresh inflation data, with Tokyo consumer prices expected to have increased at a rate exceeding the Bank of Japan’s 2% target for September.

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Additionally, purchasing manager indexes (PMIs) for September will be released for several countries, including Australia, India, and Japan, offering insights into private-sector activity. In China, the one-year medium-term lending facility rate is expected to remain unchanged at 2.3%, while data on Friday will reveal whether industrial profit growth continued its momentum in August after surging in July.

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In Europe, several central banks are preparing to announce decisions, with attention focused on whether they will follow the Fed’s lead with their own rate cuts. The Swiss National Bank, meeting on Thursday, is expected to reduce rates by a quarter point, though some observers believe the U.S. rate cut may increase the likelihood of a larger move. Meanwhile, Sweden’s Riksbank is anticipated to lower borrowing costs for the third time this year, with further cuts projected for 2024.

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In Eastern Europe, both Hungary’s and the Czech Republic’s central banks are expected to cut rates by a quarter point. The euro zone and the U.K. will release September PMIs, which will indicate the state of private-sector activity. Investors are also keeping a close eye on Germany, where economic weakness remains a concern, as well as France and Spain, which will release inflation data for September on Friday.

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Across Africa, multiple central bank decisions are also expected. Nigeria’s central bank is likely to pause its tightening cycle, while Morocco’s central bank is forecast to hold rates steady as the country prepares for major reconstruction efforts ahead of the 2030 FIFA World Cup.

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