Week ahead: Federal Reserve to cut rates, but by how much?

It’s a pivotal week for global central banks with 3 of the big 4 in action. The Federal Reserve is set to cut interest rates this week, but the question is how fast and how deep it will go. Markets are split over whether it’s going to be a 50 or 25-basis-point cut but seem agreed that the move is the first of many on its way. Odds the Bank of England will cut rates have increased, whilst a hike by the Bank of Japan could stoke further gains for the rallying yen.

Here are the week’s key events:

Monday, September 16th: Empire State manufacturing index

It’s a slow start in Asia with holidays in China and Japan but watch for the possible release of Chinese data on foreign direct investment ahead of the European session. This gets underway with European trade figures. The main release is the Empire State manufacturing index, which was soft last time. The headline general business conditions index was little changed at -4.7. New orders declined modestly, while shipments held steady. Delivery times continued to shorten, and supply availability was little changed. Inventories moved lower for a second consecutive month. Labor market conditions remained weak, with employment continuing to contract and the average workweek dropping sharply.

Tuesday, September 17th: US retail sales, Canada CPI

Following the Mario Draghi report on European competitiveness, it will be interesting to see what the latest German ZEW economic sentiment report suggest about how businesses feel – last month the diffusion index crated to just 19.2 from 41.8, the biggest drop since the pandemic-era fall in April 2020. “The economic outlook for Germany is breaking down,” said ZEW president Achim Wambach. Mario Draghi agrees, but investors are not confident much will be done about it.

In the North American session, watch for the Canadian CPI inflation report and US retail sales figures and industrial production data.

Wednesday, September 18th: Federal Reserve interest rate decision, UK inflation data

It’s Fed Day and all eyes on whether the FOMC votes for a cut of 25bps or 50bps. Markets have been uncertain how fast and deep the Federal Reserve will go, but increasingly have leaned towards 25 basis points. Traders will also pay close attention to the update summary of economic projections and dot plot.

The Fed’s economic projections from its June meeting indicated GDP growth of 2.1%, an unemployment rate of 4% and just one single interest rate cut this year. These assumptions have surely changed but it is unclear whether policymakers will indicate as many cuts as are being priced in by markets. Elsewhere, sterling could be on the move with UK inflation data that comes in before Thursday’s Bank of England meeting.

Thursday, September 19th: Bank of England

The Bank of England may not cut this time but is still likely to trim rates again this year. However, recent wage data and GDP growth figures point to a slowdown in the economy and labour market that could prompt some, on the MPC to think it’s time to cut sooner rather than later. Economic growth was flat in July vs the expected +0.2%, whilst industrial production at –1.2% was a lot weaker than forecast. Wage growth excluding bonuses declined to 5.1% in the three months to July, down from 5.4% in the quarter to May.

Elsewhere, traders should be on watch for Australian employment data, the Philly Fed manufacturing index and weekly US unemployment claims data.

Friday, September 20th: Bank of Japan

Japan’s national core CPI inflation report is going to be closely watched for the impact on JPY crosses ahead of the Bank of Japan decision. Policymakers have been offering some clues as to what to expect. Last week the BoJ’s Nakagawa said the central bank will continue raising rates if inflation remains on track. However, markets expect the BoJ to refrain from back-to-back hikes after surprising the market with a hike in July that contributed to the broader market sell-off in early August. Traders should stay on watch for hawkish comments from policymakers however, as this could see the yen strengthen and pressure equity markets. UK and Canada retail sales are due up later.

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