Fed set to cut rates for first time this cycle, but magnitude too close to call with certainty
* Following Fed Chair Powell’s Jackson Hole speech and strong hints from various Fed Governors over recent weeks, the conclusion of the Fed’s monetary policy meeting on Wednesday will deliver the first rate cut this cycle. But the magnitude of the cut is too close to call with any certainty. The slightly stronger-than-expected increase in core CPI and uptick in average weekly earnings in August might have supported a 25bps cut this week. But with rates currently well above the Fed’s estimates of the longer-run neutral level, the slowdown in jobs growth and softer components of the PPI report that feed into the core PCE deflator – the Fed’s preferred inflation gauge – arguably support a 50bps cut. On balance, Daiwa America’s Lawrence Werther expects a 25bps cut in the Fed’s FFR target range to 5.00-5.25%.

* The Fed’s updated dot plot charts will also signal a more aggressive easing path than in June, when the Fed’s median forecast had the FFR target rate at 5.00-5.25% at end-2024, 4.00-4.25% at end-2025 and 3.00-3.25% at end-2026. Indeed, while there will be a range of views on the FOMC, we expect the dots to suggest cuts in each of the remaining two meetings this year, with the remainder of the easing cycle to be front-loaded in 2025 to take the FFR back to 2.75% by the end of next year.

BoE likely to leave rates on hold but signal further cuts to come; QT to be extended close to recent pace
* Following a cut of 25bps in August, the BoE’s latest monetary policy announcement on Thursday is expected to leave Bank Rate unchanged at 5.00%. The MPC will likely repeat its guidance that policy “will remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further”. It will also probably repeat that it will continue “to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting.” However, we also expect a signal that rates are likely to be cut again at the following meeting in November. Indeed, we expect at least one MPC member (Swati Dhingra) to vote for another cut at this month’s meeting. And the replacement of one of the MPC hawks (Jonathan Haskel) with a new member (Alan Taylor) whose views on rates are unclear adds further uncertainty about the extent of pressure for immediate easing.

* Wednesday’s CPI report also adds an element of uncertainty ahead of the MPC’s decision. In line with the consensus we forecast headline inflation to move sideways at 2.2%Y/Y in August, thanks in part to lower petrol prices. But having dropped to a near-three-year low of 3.3%Y/Y in July, core inflation is expected to have jumped back as the services component rebounds, due in part to pay-back for the temporary decline in typically volatile components in July. Admittedly, our forecast assumes services inflation remains below the MPC’s projection of 5.8%Y/Y. And so, if Wednesday’s report delivers a significant downside surprise, we do not rule out a majority voting for a further 25bps cut this week.

* In terms of quantitative tightening, we currently expect the BoE to aim to reduce its Asset Purchase Facility (APF) holdings by roughly £100bn over the coming twelve months. That would broadly maintain the pace of balance sheet reduction of the past year. But it would also imply a slowdown in the pace of active Gilt sales offset by an increase in the pace of roll-off of maturing bonds. It would also push the total stock of bank reserves down close to levels that the BoE considers to be optimal. Given the recent marked uptrend in take-up of the Short-term Repo facility, however, we do not rule out that the BoE might slow the pace from March to mitigate any perceived risks of unintentional and possibly destabilizing bank reserve scarcity arising next year.

BoJ to leave policy unchanged
* Following the rate hike at the end of July, the BoJ’s policy announcement on Friday is widely expected to leave policy unchanged, with the overnight call rate at 0.25%. Given the recent positive signs in wages, with regular pay growth of close to 3%Y/Y arguably consistent with achieving the 2% inflation target over the medium term, Ueda is likely to leave the door open to a further rate hike at the October meeting. Indeed, Friday’s CPI release is expected to show that headline inflation rose to an 11-month high in August of 3.0%Y/Y. The BoJ’s preferred core CPI rate – excluding fresh foods and energy – is also forecast to edge back up to the 2%Y/Y target, albeit this will more than 2ppts below the recent peak. But the internationally comparable core rate – excluding all food and energy – might well be little changed from July’s 19-month low of 1.6%Y/Y.

The BoJ will also have to be mindful of developments in the FX market, with the yen having appreciated more than 15% against the dollar since early July through ¥140/$ earlier today and at risk of further appreciation if and when the Fed eases aggressively. In addition, a leading candidate in the LDP leadership election at the end of the month (Sanae Takaichi) has called for the BoJ to maintain easy policy, while there is a good chance that the victor in that contest will choose to call a snap general election in October or November. And should Donald Trump win and follow through on his proposals for significant new tariffs on all imports, the outcome of the US election would also have significant implications on the Japanese economic outlook. So, Ueda might ideally this week downplay the need to adjust rates again over the near term.

Data highlights
Tomorrow:
* US retail figures for August are expected to report a modest decline in sales (-0.2%M/M) in part reflecting weakness in vehicle sales last month. Excluding autos and gasoline, Daiwa America forecasts nominal sales to rise 0.3%M/M. Meanwhile, US industrial production is expected to report a modest bounce back (0.4%M/M) following the Hurricane-related drop in July. In the euro area, the ZEW investor survey is likely to tally the downbeat assessment in last week’s Sentix survey and decline in equity markets since the start of the month, signalling greater investor pessimism about the German economic outlook in particular.

Wednesday:
* In addition to the aforementioned UK CPI, updated estimates of euro area inflation are expected to confirm that the headline HICP rate fell 0.4pp to 2.2%Y/Y, the softest rate in more than three years. The flash release reported a more modest decline in the core rate (down 0.1ppt to 2.8%Y/Y), due to stickiness in services. The detail in this report will likely confirm that many of these price pressures were concentrated in the hospitality, tourism and transport-related subsectors that are subject to significant volatility and boosted by the Paris Olympics. Meanwhile, Japan’s goods trade report is expected to show the headline deficit widening in August as the increase in the value imports exceeded that of exports over the summer.

Friday:
* In addition to Japan’s CPI release, Friday will bring UK retail sales figures for August and September’s consumer confidence survey results. Following a modest rise in July (0.5%M/M), retail surveys point to a further increase in sales volumes last month as demand was boosted by an improvement in weather conditions and auto fuel sales likely benefitted from lower petrol prices. Expectations are for another rise of around ½%M/M, which would leave them trending so far in Q3 almost 1% above the Q2 average.