World braces for Fed easing amid 36-hour rate rollercoaster

(Bloomberg) — The tectonic plates of the global economy will shift this week as a U.S. easing cycle begins, just as officials from Europe to Asia set policy against a backdrop of fragile markets.

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A 36-hour financial rollercoaster will begin with the Federal Reserve's likely decision to cut interest rates on Wednesday and end with the results of the Bank of Japan's first meeting on Friday as it raises borrowing costs and helps sow a global selloff.

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Along the way, central banking peers poised to adjust their own policy levers in 20 and beyond include Brazil, where officials may tighten for the first time in 3 1/2 years, and the Bank of England. The UK's central bank faces a delicate judgment on the pace of its balance-sheet opening and may also signal how ready it is to ease further.

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

The Fed's decision will take center stage, with jittery traders debating whether officials will judge a quarter-point cut as sufficient medicine for an economy showing signs of losing momentum, or whether they will instead opt for a half-point move. Clues to the Fed's future intentions will also be important.

But for the US announcement to end the suspense, investors may be on edge at least until the BoJ is done, a decision that is bound to be scrutinized for clues to its next hike.

What Bloomberg Economics Says:

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

—Anna Wang, Stuart Paul, Eliza Winger, Estelle Ou and Chris G. Collins, Economist. For full analysis, click here

Memories of the market rout a few weeks ago will be focusing minds amid unease in yen-focused carry trades after its rate hike in July.

And that's not all: China may also be in the limelight, with a fiscal announcement by officials there expected at some point — days after data showed the world's second-largest economy is suffering signs of spiraling inflation.

Click here for what happened last week, and our wrap below of what's coming to the global economy.

USA and Canada

When Fed policymakers sit down Tuesday to begin their two-day meeting, they will have fresh statistics on the state of consumer demand. While overall retail sales in August were held back by sluggish activity at auto dealers, receipts from other dealers likely posted a healthy advance.

Despite signs of consumer resilience, the Fed report due the same day is expected to show a lingering malaise in factory output. The upcoming November election and still high borrowing costs are restraining capital spending.

On Wednesday, government figures showed that housing starts firmed last month after falling to the lowest level since May 2020 in July. Thursday's National Association of Realtors data will likely show weakness in closings on previously owned home sales.

Canada's inflation reading for August is likely to show continued slowdown in both headline and key measures. A slight uptick won't knock the Bank of Canada off its easy path, though, as cooler-than-expected data could fuel calls for deeper rate cuts.

Asia

BOJ chief Kazuo Ueda is bound to get a lot of attention after the board sets policy on Friday.

While economists disagree on predicting any change in borrowing costs, the governor characterized how the trajectory could push the Japanese currency, which has already spooked yen-bearing traders by outpacing its peers this month.

Elsewhere, the 1-year medium-term loan and lending prime rates in China are expected to be kept unchanged, and Indonesia's central bank has tipped its policy rate on hold for a fifth month. Taiwanese authorities set the discount rate on Thursday.

On the data front, Japan's core consumer inflation gauge ticked a tad higher in August, supporting the BOJ's eye for a rate hike in the coming months.

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

Europe, Middle East, Africa

A number of central bank decisions have been scheduled in the wake of possible Fed easing. Given their reliance on dollar-denominated energy exports, the Gulf states may automatically follow the US lead by lowering their own rates.

Here's a quick roundup of Thursday's other announcements, mainly in Europe, the Middle East and Africa:

• While no rate change is expected from the BOE, investors are awaiting a key ruling on whether it will accelerate its bond portfolio to keep gilt sales steady a year before an unusually high amount of debt matures. Indications of the pace of future rate cuts will also be eagerly awaited, amid speculation that officials will soon ease up to support the economy.

• Norges Bank is seen keeping its deposit rate at 4.5%, with analysts eyeing any adjustment in forecasts for easing early next year. Slowing inflation raised bets on the first cut in December, Norwegian officials said, with the labor market strong and the krone near multi-year lows likely to remain in their unlikely position.

• The central banks of Ukraine and Moldova are also scheduled for a decision.

• Turning south, Turkey's central bank is poised to keep its key rate at 50% for a sixth straight meeting as it waits for inflation to slow further. The pace of annual price growth slowed from 75% in May, but remained high at 52%. Officials expect it to be closer to 40% by the end of the year.

• With data on Wednesday forecast to show South African inflation slowed to 4.5% in August, the central bank could cut borrowing costs for the first time since 2020 a day later. Governor Lesetza Kogniago said the agency would adjust rates once price growth was firmly at the 4.5% midpoint of its target range, where it prefers to anchor expectations. Forward-rate contracts, used to estimate the cost of borrowing, are fully priced at the chance of a 25-basis-point rate cut.

• Angola's decision could be a close call between a hike and a hold. Although inflation is easing, the currency has weakened about 7% against the dollar since August.

• On Friday, Eswatini, whose currency is pegged to the South African rand, is expected to follow its neighbors and lower rates.

Elsewhere, comments from European Central Bank officials may be scrutinized for any indication of future easing following a second cut in borrowing costs. Several governors are scheduled to attend, and President Christine Lagarde will deliver a speech in Washington on Friday.

Speaking over the weekend, hawkish policymakers Joachim Nagel and Pierre Wansch warned that the ECB needs to be wary of inflation, even as the latter acknowledged that further rate cuts are likely if the central bank's base scenario comes to fruition.

Other things to watch include euro-area consumer confidence on Friday, and outside the currency zone, the Swiss government forecast on Thursday.

Turning south, data on Sunday showed that inflation in Israel accelerated more than expected last month, to 3.6% year-on-year, as the war in Gaza strained the economy and increased government spending.

In Nigeria on Monday, data will likely show inflation slowed to 32.3% in August for a second straight month. It continues to decline due to the impact on prices of a currency devaluation and the temporary removal of fuel subsidies last year.

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

Latin America

Brazil's central bank meets against a backdrop of an overheated economy, above-target inflation, unchanged CPI expectations and government revenue gains.

Compounding this, investors and analysts expect Wednesday to see tightening monetary policy for the first time in 3 1/2 years. Consensus is for a 25 basis-point hike to 10.75%, with another 75 basis point tightening to follow later in the year, taking the key rate to 11.5%.

Colombia's six July economic reports should underscore the resilience of domestic demand that analysts have identified in their third- and fourth-quarter growth forecasts.

The retail sales momentum could build on June's positive print, which snapped a 16-month slide, while early consensus included GDP-proxy data showing a return to activity after June's mild slowdown.

Paraguay's rate-setters match inflation running slightly above the 4% target. Analysts polled by the central bank had seen 25 basis-points lower by the end of the year.

After nearly 10 months of President Javier Milli's so-called shock therapy, this week Argentina is set to deliver some telling data about the state of the economy.

Budget data may show the government posted an eighth straight monthly budget surplus in August, while the same scorched-earth saving contributed to a third-quarter contraction in output.

Meanwhile, Peruvian data released on Sunday showed that the economy grew significantly in July, resuming a recovery that was abruptly halted a month ago.

— With assistance from Brian Fowler, Vince Golley, Robert Jameson, Laura Dhillon Kane, Jane Pong, Piotr Skolimowski, and Monique Vanek.

(Updates with Israel in the EMEA section, Peru in the Latin America section)

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