World braces for Fed easing amid 36-hour spike in interest rates

The world economy is set to undergo a tectonic shift this week as the U.S. begins its easing cycle, as policymakers in Europe and Asia set policy against a backdrop of volatile markets.

The 36-hour currency roller coaster will begin on Wednesday with a possible Fed rate cut and end on Friday.

This is the outcome of the first meeting since the Bank of Japan raised borrowing costs, sowing the seeds of a global sell-off.

Among central bankers beyond the G20 who are prepared to adjust their own policy levers along the way are Brazil, where officials could tighten for the first time in three and a half years, and the Bank of England, which is facing a delicate judgment about the pace at which it will reduce its balance sheet and could show how ready it is for further easing.

Policymakers in South Africa are expected to cut borrowing costs for the first time since 2020, while those in Norway and Turkey are likely to keep costs the same.

The Fed decision will be central, with nervous traders debating whether officials will decide a 0.25% cut is the right medicine as the economy shows signs of losing momentum, or whether they will opt for a 0.5% cut. Clues about the Fed’s future intentions will also be important. But even if the U.S. announcement eases tensions, investors are likely to remain nervous at least until the BOJ makes its decision, which will be closely watched for clues about the next hike. Bloomberg Economics says:
“We think Fed Chair Jerome Powell supports a 50 basis point cut, but we don’t think he’ll get the full committee’s support, given that New York Fed President John Williams didn’t send a clear signal before the pre-meeting blackout period.”
—Anna Wong, Stuart Paul, Eliza Winger, Estelle Ou, and Chris G. Collins, economists.

You may recall the market turmoil a few weeks ago as the yen-centric carry trade unravelled following the July rate hike.

And that’s not all. China could also be in the spotlight, with Chinese officials expected to announce monetary policy at some point. This comes days after data showed the world’s second-largest economy was experiencing signs of sharp deflation.

United States and Canada
As federal policymakers sit down for a two-day meeting Tuesday, new figures on the state of consumer demand will be forthcoming. Overall retail sales in August were likely subdued by slowing activity at auto dealers, but sales at other dealers probably posted healthy gains.

Despite signs of consumer recovery, a Federal Reserve report due out the same day is expected to show continued uncertainty in factory production. The upcoming November election and still high borrowing costs are holding back capital spending.

Government figures released Wednesday showed housing starts recovered steadily last month after falling to their lowest level since May 2020 in July.

National Association of Realtors data released Thursday are likely to show that existing home sales contracts remain weak.

Canada’s August inflation numbers are likely to show continued deceleration in both headline and core indicators. However, a slight increase would not derail the Bank of Canada’s easing path, but weaker-than-expected data could prompt a bigger rate cut.

Asia
BOJ Governor Kazuo Ueda is likely to be in the spotlight after the board sets policy on Friday.

Economists are unanimous in their prediction that borrowing costs will remain unchanged, but how the governor describes the trajectory could have a knock-on effect for the Japanese currency, which has outperformed its peers so far this month and is making yen traders nervous.

Elsewhere, China’s one-year medium-term lending and lending benchmark rates are expected to remain unchanged, while Indonesia’s central bank is expected to keep its policy rate unchanged for five months. Taiwan authorities decide on the discount rate on Thursday.

On the data front, Japan’s main consumer price inflation gauge is expected to pick up slightly in August, supporting the possibility that the BOJ will raise rates in the coming months.

Japan, Singapore, Indonesia and Malaysia are due to release trade figures, while New Zealand is due to report second-quarter data, which suggests the economy may have contracted slightly compared with the previous quarter.

Europe, Middle East, Africa
Several central bank decisions are due to follow the Fed’s easing potential. Given their dependence on dollar-denominated energy exports, Gulf states may automatically follow the U.S. lead and cut their own rates.

Here’s a quick recap of other key announcements coming from Europe, the Middle East and Africa, with a focus on Thursday.
While no change in interest rates is expected from the BOE, investors are awaiting a crucial judgment on whether to accelerate the reduction of its bond portfolio to keep government bond sales steady a year before an unusually large amount of debt matures. Hints about the pace of future rate cuts are also eagerly awaited amid speculation that officials will soon step up easing measures to help the economy.

The Norwegian central bank is expected to keep its deposit rate at 4.5%, with analysts focusing on adjusting their forecasts for easing early next year. Slowing inflation has increased bets for a first cut in December, but Norwegian officials can maintain a tough stance as the labor market is strong and the krone is near its lowest level in years.

The central banks of Ukraine and Moldova are also expected to make decisions.

Turning south, the Turkish central bank will keep its key interest rate at 50% for its sixth meeting as it waits for inflation to slow further. The annual rate of price inflation has fallen from 75% in May to 52%. Officials hope it will be closer to 40% by year-end.

South Africa’s central bank could cut borrowing costs for the first time since 2020 a day later after data released on Wednesday showed inflation in August slowed to 4.5%. Governor Lesetja Kganyago said the central bank would adjust rates if inflation reached the midpoint of its target range of 4.5%. The central bank prefers to anchor expectations at this point. Forward rate contracts used to speculate on borrowing costs are already pricing in a 25 basis point cut.

Angola’s decision could be a close call between a raise and a hold. Inflation is easing, but the currency has weakened by about 7% against the dollar since August.

Swaziland, whose currency is pegged to the South African rand, is also expected to follow its neighbours and lower its rate on Friday.

Elsewhere, comments from European Central Bank officials could be closely scrutinized for hints about the future easing path after the second round of cuts to borrowing costs. Several central bank governors are expected to appear, and President Christine Lagarde is due to speak in Washington on Friday.

Other things to watch include the euro zone consumer confidence survey on Friday, the non-currency zone consumer confidence survey on Thursday, and the Swiss government’s outlook.

Looking south, data released Sunday showed Israel’s inflation rate held steady at 3.2% in August, still above the government’s target of 1% to 3%.

The economy is weakening, but the war in Gaza is creating supply-side constraints and government spending is increasing, putting inflationary pressures at risk.

In Nigeria, data on Monday showed inflation slowed for the second straight time in August to 32.3%, as the impact of last year’s currency devaluation and temporary removal of fuel subsidies on prices continued to fade.

The move was part of reforms introduced by President Bola Tinubu after he took office in May 2023.

Latin America
Brazil’s central bank is meeting against a backdrop of an overheated economy, inflation above target, wavering CPI expectations and government fiscal generosity.

All told, investors and analysts expect to see the first tightening of monetary policy in three and a half years on Wednesday, with the consensus being a 25 basis point hike to 10.75%, with another 75 basis points to be raised by year-end, taking the key rate to 11.5%.

Colombia’s July 6 economic report is likely to highlight the resilience of domestic demand, which will likely lead analysts to revise up their third- and fourth-quarter growth forecasts.

The pace of retail sales halted a 16-month decline, helped by a positive June reading, while initial consensus was that proxy GDP data showed activity rebounding after a mild contraction in June.

Paraguay’s rate setters are facing inflation that is just above their 4% target. Analysts surveyed by the central bank expect a 25 basis point cut by year-end.

Nearly 10 months into President Javier Millei’s so-called shock therapy, Argentina is expected to have some meaningful data on its economic situation this week.

Budget data showed the government recorded its eighth straight month of budget surplus in August, while the same scorched-earth policies led to a third straight quarter of contraction in output.