• The Fed delivered a 50 bp cut; Dot Plots suggest a gradual easing cycle; Powell’s press conference was measured; yet market easing expectations have intensified; weekly jobless claims will be of interest
  
• The struggle between the ECB hawks and doves continues; BOE is expected to keep rates steady at 5.0%; Norges Bank delivered a hawkish hold; Turkey is expected to keep rates steady at 50.0%; SARB is expected to cut rates 25 bp to 8.0%
  
• The two-day BOJ meeting began today; Australia reported August jobs data; New Zealand reported Q2 GDP data; Taiwan kept rates steady at 2.0%, as expected

The dollar remains soft in the wake of the FOMC decision. DXY is trading flat near 100.631 as the market digests the Fed’s 50 bp cut and messaging (see below). The yen is underperforming as the two-day BOJ meeting got under way (see below), with USD/JPY trading higher near 143. The euro is trading higher near $1.1175, while sterling is trading higher near $1.3275 ahead of the BOE decision (see below). Despite the Fed’s efforts to push back in the Dot Plots and Powell’s press conference (see below), market easing expectations have intensified. Yet the U.S. data remain firm and so we continue to believe that the market is once again overreacting and dead wrong in pricing in 250 bp of further easing over the next 12 months. Yet we cannot stand in the way of this move and so until market pricing changes, the dollar is likely to remain under pressure.

AMERICAS

The two-day FOMC meeting ended with an unexpected 50 bp cut. Only a handful of analysts polled by Bloomberg saw the larger cut, while the market was pricing in around 70% odds of such a move, up from 10% after the PPI data. Only Governor Bowman dissented in favor of a smaller 25 bp cut, which means virtually the entire FOMC is on board with Powell. It was the first dissent since June 2022 and the first Governor to dissent since 2005.

The new Dot Plots suggest a gradual easing cycle. The 2024 median moved down to 4.375% vs. 5.125% in June, while the 2025 median moved to 3.375% vs. 4.125% and the 2026 median moved to 2.875% vs. 3.125% in June. This added another 25 bp of tightening to the forecast horizon, but the expected pace of easing overall remains modest. 2027 was added and its Dot came in at 2.875%. Lastly, the longer-term Dot moved up to 2.875% vs. 2.75% in June.

Chair Powell’s post-decision press conference was measured. He stressed that the Fed is not in a rush and that no one should view 50 bp as the new pace. Powell said the Fed does not believe it is behind the curve but noted that the rate cut is a sign of commitment not to get behind. He said he doesn't see anything suggesting that the odds of a downturn are elevate. Lastly, Powell said that unemployment in the low 4s shows a good labor market, which implies that a move to the high 4s would cause some concern at the Fed.

Market easing expectations have intensified despite the Fed’s efforts to push back. After initially paring back expectations after the decision, the market is now pricing in 75 bp of further easing by year-end. More surprising is the fact that the market is pricing in nearly 250 bp of further easing over the next 12 months that would take the Fed Funds rate well below neutral. This would only happen if the U.S. were to quickly fall into a deep recession and that is simply not happening. The dollar is suffering today as a result. However, the fact that the dollar gained yesterday after market easing expectations initially fell offers hope that it can regain traction once this dovish market interpretation adjusts. It is not a question of if, but when. We cannot reconcile the notion of 250 bp of easing over 12 months with the current economic outlook. Neither can the Fed, we suspect.

Updated macro forecasts were also released. The 2024 growth forecast was lowered one tick to 2.0% and unchanged at 2% thereafter, consistent with moderate growth. The unemployment rate forecast was raised across the projection horizon but remains in the low 4s, in line with solid labor market conditions. Finally, PCE inflation forecasts were tweaked lower for 2024 and 2025 while still projected to return sustainably to 2% in 2026. Nothing in these projections suggests the need for aggressive Fed easing and yet here we are.

Indeed, growth remains robust in Q3. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 2.9% SAAR, down from 3.0% previously. It will be updated next Friday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q3 growth at 2.6% SAAR and Q4 growth at 2.2% SAAR. Both estimates will be updated tomorrow.

Weekly jobless claims will be of interest. That’s because initial claims data will be for the BLS survey week containing the 12th of the month and are expected to remain steady at 230k. if so, the 4-week moving average would fall slightly to 230k and match the low since early June. Elsewhere, continuing claims are reported with a one-week lag and are also expected to remain steady at 1.850 mln, which is the lowest since mid-June. There is no Bloomberg consensus yet for September NFP but its whisper number stands at 132k vs. 142k in August. From what we can tell, the labor market remains in solid shape.

Regional Fed surveys for September will continue rolling out. Philly Fed manufacturing is expected at 0.0 vs. -7.0 in August. Earlier this week, Empire manufacturing survey kicked things off and came in at 11.5 vs. -4.0 expected and -4.7 in August.

Housing market data will continue rolling out too. August existing home sales are expected at -1.3% m/m vs. 1.3% in July. Yesterday, August building permits (4.9% m/m vs. 1.0% expected) and housing starts (9.6% m/m vs. 6.5% expected) came in strong. August leading index will also be reported.

EUROPE/MIDDLE EAST/AFRICA

The struggle between the ECB hawks and doves continues. With regards to market pricing for a terminal rate of 2% with inflation cooling as projected, Knot said that “As long as that’s the case, I’m more or less fine with market expectations of further cuts. I’m not going to tell you how much and when because we’re data-dependent and we should be data-dependent.” Elsewhere, Centeno warned that the ECB may have to accelerate its easing and warned “Given the position in which we are today, in the monetary policy cycle, we have really to minimize the risk of undershooting, because that’s the main risk.” Nagel and Schnabel speak later today while Lagarde speaks tomorrow.

Bank of England decision is due out shortly and it is expected to keep rates steady at 5.0%. A majority of MPC members will likely want to wait for the upcoming October 30 government budget and the November 7 BOE Monetary Policy report before cutting rates again. Interest rate futures imply a low 25% probability of a 25 bp cut this week. Attention will be on the vote split and the target reduction in in the BOE’s stock of UK government bonds for the next 12 months.

The BOE’s decision to cut the policy rate in August was a close call. The vote split was 5-4, with the 4 dissenters supporting the case for no policy change. Notably, Governor Bailey voted with the majority for a cut while Chief Economist Pill preferred to maintain the rate at 5.25%. Haskel was another MPC member who voted to keep rates on hold in August but he’s since been replaced by Alan Taylor.

The BOE is also expected to vote to reduce the stock of U.K. government bonds. Specifically, it should plan to reduce its holdings by GBP100 bln over the next 12 months, driven by GBP87 bln worth of maturing gilts. The past 12 months reduction in the stock of gilts was also set at GBP100 bln but was equally split between maturities and sales. Overall, the BOE estimates quantitative tightening to have had little impact on gilt yields, the real economy, and market functioning.

Norges Bank delivered a hawkish hold. The bank left the policy rate steady at 4.50% but continued to lean against market pricing for an earlier and deeper easing cycle. The expected rate path was basically unchanged as the bank stressed that “the policy rate will likely be kept at 4.5% to the end of the year” with the first 25 bp cut seen in Q2 2025. The new policy guidance is similar to the one made in June “but indicates a slightly faster decline in the policy rate through 2025.” The swaps market has pushed the first cut out to January from December previously, and now sees 125 bp of total easing over the next twelve months vs. 150 bp before the decision.

Turkey central bank is expected to keep rates steady at 50.0%. At the last meeting August 20, the bank delivered a hawkish hold and reiterated that it would keep policy tight until “a significant and sustained decline in the underlying trend of monthly inflation is observed.” It added that “The alignment of inflation expectations and pricing behavior with projections has gained relative importance for the disinflation process.” However, the market is still pricing in the start of an easing cycle over the next three months. We concur.

South African Reserve Bank is expected to cut rates 25 bp to 8.0%. If there was ever any doubt, it should have been erased by August CPI data yesterday. Headline came in a tick lower than expected at 4.4% y/y vs. 4.6% in July, the lowest since April 2021 and below the center of the 3-6% target range. Looking ahead, the market is pricing in 150 bp of total easing over the next 12 months.

ASIA

The two-day Bank of Japan meeting began today. It is likely to end with a widely expected hold. The BOJ is also expected to reiterate plans to tighten policy further “if the outlook for economic activity and prices…will be realized.” BOJ Governor Ueda and other BOJ officials have cautioned recently that financial markets “remain unstable” which argues for a pause in the tightening cycle until further notice. Some analysts are arguing for a December hike but the BOJ would have to start laying the groundwork this week, but we think it's a 2025 story. Indeed, the market is not pricing in the next hike until well into 2025, with only 25 bp of total tightening seen over the next 12 months.

Australia reported August jobs data. 47.5k jobs were added vs. 26.0k expected and a revised 48.9k (was 58.2k) in July. However, the mix was not good as all the new jobs were part-time at 50.6k while full-time jobs fell -3.1k. Still, the unemployment remained steady as expected at 4.2% on an unchanged participation rate of 67.1%, also as expected. we expect the RBA to join the global easing cycle later this year because underlying economic activity is weak and points to lower inflation pressures. The market continues to price in high odds (around 70%) of a 25 bp cut by December.

New Zealand reported Q2 GDP data. Real GDP fell -0.2% q/q vs. -0.4% expected and a revised 0.1% (was 0.2%) in Q1, while the y/y rate came in at -0.5% vs. -0.6% expected and a revised 0.5% (was 0.3%) in Q1. The primary industry group (agriculture, forestry, and fishing and mining) was the main drag on growth, while the goods producing industry group made a positive growth contribution and the services industry was flat. The shallower downturn in New Zealand economic activity lowers the likelihood of 100 bp of rate cuts by year-end, with odds moving closer to 75 bp instead.

Taiwan central bank kept rates steady at 2.0%, as expected. However, it tightened liquidity by raising commercial bank reserve ratios 25 bp for the second straight meeting. The bank also tightened home-buying rules for the second straight meeting, including expanding limits on borrowing to buy second homes to more regions. This comes after the bank last month asked banks to cool property lending. Of note, inflation edged higher in June and July before falling a bit in August to 2.36% y/y. While the bank does not have an explicit inflation target, elevated price pressures and property market concerns should keep rates on hold for now. Indeed, the swaps market sees steady rates over the next 36 months.