World braces for Fed easing amid sharp 36-hour rate swings

(Bloomberg) — The tectonic plates of the global economy are set to shift this week when the U.S. monetary easing cycle begins, with officials from Europe to Asia setting policies against a backdrop of fragile markets.

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A 36-hour rollercoaster ride will begin with the U.S. Federal Reserve's likely decision to cut interest rates on Wednesday and end on Friday with the outcome of the Bank of Japan's first meeting since it raised borrowing costs and helped sow the seeds for a global sell-off.

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Along the way, similar central banks in the G20 and beyond are preparing to adjust their monetary-policy tools, including Brazil, where officials may tighten policy for the first time in three-and-a-half years, and the Bank of England. The British central bank faces a delicate judgment about the pace of shrinking its balance sheet, and may also signal how much it is prepared to ease further.

South African policymakers are expected to cut borrowing costs for the first time since 2020, while their counterparts in Norway and Turkey may leave them unchanged.

The Fed’s decision will take center stage, as nervous traders debate whether officials will consider a quarter-point rate cut sufficient relief for an economy showing signs of losing momentum, or whether they will opt for a half-point cut instead. Indications of the Fed’s future intentions will also be crucial.

But despite all the anticipation and anticipation that the US announcement will bring, investors are likely to remain on edge at least until the Bank of Japan makes its decision, which is sure to be scrutinized for clues as to where it will go next to raise interest rates.

What Bloomberg Economics says:

“We believe Fed Chair Jerome Powell is in favor of a 50 basis point rate cut. However, the lack of a clear signal from New York Fed President John Williams before the pre-meeting blackout period makes us believe that Powell does not have the full support of the committee.”

—Anna Wong, Stuart Paul, Eliza Winger, Estelle Au, and Chris J. Collins, economists. For the full analysis, click here

Memories of the turmoil in markets a few weeks ago, with yen-based trading falling after the July interest rate hike, will remain fresh in the minds.

But that's not all: China could be in the spotlight too, with a critical announcement by officials there due at some point — days after data showed the world's second-largest economy is suffering signs of deepening contraction.

The story continues

Click here to see what happened last week, and here's our summary of what's coming in the global economy.

United States and Canada

When Federal Reserve policymakers meet Tuesday to begin their two-day meeting, they will get fresh figures on the state of consumer demand. While overall retail sales in August may have been held back by a slowdown in auto dealerships, revenues at other retailers may have been healthy.

Despite signs of resilience among consumers, the Fed report due out the same day is expected to show factory output remaining stagnant. The looming November election and still-high borrowing costs are also constraining capital spending.

Government figures on Wednesday are expected to show that housing starts firmed last month after falling in July to their lowest level since May 2020. Data from the National Association of Realtors on Thursday is likely to show that contract closings on sales of previously owned homes remained weak.

Canada’s August inflation reading is likely to show continued slowdown in both headline and core indicators. However, the slight uptick will not deter the Bank of Canada from its easing path, while cooler-than-expected data could bolster calls for deeper rate cuts.

Asia

Bank of Japan Governor Kazuo Ueda is expected to get a lot of attention after the board decides on monetary policy on Friday.

While economists are unanimous that borrowing costs will not change, the way the governor describes the path could rattle Japan's currency, which has already spooked yen traders by outperforming its peers so far this month.

Elsewhere, China’s one-year medium-term lending rate is expected to remain unchanged, Indonesia’s central bank is expected to keep rates steady for a fifth straight month, and Taiwan’s discount rate is set to be decided on Thursday.

On the data front, Japan's core consumer inflation is expected to rise slightly in August, supporting the case that the Bank of Japan may consider raising interest rates in the coming months.

Japan, Singapore, Indonesia and Malaysia will release trade figures, while New Zealand is due to report second-quarter data that could show the economy contracted slightly compared to the previous quarter.

Europe, Middle East and Africa

Several central bank decisions are due to be made in the wake of the US Federal Reserve’s rate cut. Given their reliance on dollar-denominated energy exports, Gulf countries may automatically follow the US in cutting interest rates.

Here's a quick rundown of other announcements scheduled to be made in Europe, the Middle East and Africa, especially on Thursday:

• While no change in interest rates is expected from the Bank of England, investors are awaiting a crucial verdict on whether it will accelerate the reduction of its bond portfolio to keep government bond sales steady a year ago as an unusually high amount of debt matures. Investors will also be anxiously awaiting hints on the pace of future rate cuts, amid speculation that officials will soon step up monetary easing to help the economy.

• The Norwegian central bank is expected to keep its deposit rate at 4.5%, with analysts focusing on any changes to expectations for monetary policy easing early next year. While slowing inflation has increased bets for an initial cut in December, Norwegian officials may stick to their hawkish stance with the labor market strong and the krone near multi-year lows.

• The central banks of Ukraine and Moldova are also scheduled to hold their decisions.

• Moving south, Turkey’s central bank is set to keep its key interest rate at 50% for a sixth straight meeting, waiting for inflation to slow further. Annual price growth has slowed from 75% in May, but remains high at 52%. Officials hope to reach closer to 40% by the end of the year.

• With data expected on Wednesday showing South Africa’s inflation slowing to 4.5% in August, the central bank could cut borrowing costs for the first time since 2020 the following day. Governor Lesetja Kganyago said the institution would adjust rates once price growth reached the 4.5% midpoint of its target range, as it prefers to anchor expectations. Interest rate forward agreements, used to speculate on borrowing costs, are fully pricing in the chance of a 25 basis point rate cut.

• Angola’s decision may be a close call between raising interest rates and keeping them there. While inflation is falling, the currency has weakened about 7% against the dollar since August.

• Eswatini, whose currency is pegged to the South African rand, is expected to follow its neighbour and cut interest rates on Friday.

Elsewhere, comments from European Central Bank officials may be scrutinized for any hints about the path of future easing after a second cut in borrowing costs. Several governors are scheduled to attend, and President Christine Lagarde will address the Washington forum on Friday.

In comments over the weekend, hawkish policymakers Joachim Nagel and Pierre Wunsch warned that the ECB needs to remain vigilant on inflation, even as the latter acknowledged that further rate cuts were likely if the central bank's baseline scenario materialized.

Other things to watch include eurozone consumer confidence on Friday, and outside the currency area, the Swiss government's forecast on Thursday.

Moving south, data due out Sunday is expected to show that inflation in Israel held steady at 3.2% in August, still above the government’s target of 1% to 3%. The economy is weak, but the war in Gaza is creating supply constraints and government spending is rising, keeping inflationary pressures high.

In Nigeria, data on Monday is likely to show inflation slowed for a second straight month in August, to 32.3%, as the impact of last year’s currency devaluation and the temporary removal of fuel subsidies continues to wane on prices.

These measures were part of reforms introduced by President Bola Tinubu after assuming office in May 2023.

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The Brazilian central bank meets against a backdrop of an overheating economy, above-target inflation, unstable CPI forecasts, and government fiscal largesse.

Given all this, investors and analysts are expecting the first monetary policy tightening in three and a half years on Wednesday. The consensus is for a 25 basis point hike to 10.75%, followed by another 75 basis point tightening by the end of the year, bringing the key rate to 11.5%.

Colombia's six economic reports in July are expected to confirm the resilience of domestic demand, prompting analysts to raise their growth forecasts for the third and fourth quarters.

Retail sales could be driven by positive June data, which ended a 16-month slide, while early consensus is that GDP data shows a rebound in activity after a mild slump in June.

Paraguay’s interest rate setters meet as inflation rises just above the 4% target. Analysts polled by the central bank expect a 25 basis point rate cut by the end of the year.

After nearly ten months of shock therapy launched by President Javier Milei, this week he is due to present some indicative data on the state of the Argentine economy.

Budget data may show the government posted an eighth straight month of budget surplus in August, while the same austerity helped push output down for a third straight quarter.

–With assistance from Brian Fowler, Vince Juul, Robert Jameson, Laura DeHillon Kane, Jane Bong, Piotr Skolimowski and Monique Vanek.

(Updates with the European Central Bank in the Europe, Middle East and Africa section)

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