Market Outlook: Buckle up for this 36-hour rollercoaster ride

A 36-hour monetary rollercoaster will begin with the 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 spark a global selloff.

Along the way, central bank partners in the Group of 20 and beyond poised to adjust their own policy levers include Brazil, where officials may tighten for the first time in 3½ years, and the Bank of England. The UK central bank faces a delicate judgment about the pace of unwinding its balance sheet 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 may keep them unchanged.

The Fed’s decision will take center stage, with jittery traders debating whether officials will see a quarter-point cut as adequate medicine for an economy showing signs of losing momentum, or whether they will opt for a half-point move. Clues about the Fed’s future intentions will also be key.

But for all the suspense the US announcement will bring, investors are likely to remain on the sidelines at least until the BOJ finishes, in a decision that needs to be watched for clues about its next hike.

Focused minds will be reminders of the market turmoil of a few weeks ago amid easing in yen-centric carry trades following July’s rate hike.

And that’s not all: China could also be in the spotlight, with a monetary announcement from officials there expected at some point – days after data showed the world’s second-largest economy is suffering signs of deflation spiral.

USA and Canada

When Fed policymakers gather for the start of their two-day meeting on Tuesday, they will have new numbers on the state of consumer demand. While overall retail sales in August were likely hampered by slower activity at car dealerships, receipts at other retailers likely saw a healthy advance.

Despite signs of consumer resistance, a Fed report out the same day is expected to show a general malaise in factory output. The looming November election and still high borrowing costs are limiting capital spending.

On Wednesday, government figures showed that housing starts strengthened last month after falling in July to the lowest level since May 2020. Data from the National Association of Realtors on Thursday is likely to show that closings on home sales previously owned homes remained weak, however.

Canada’s inflation reading for August is likely to show a continued deceleration in both headline and core measures. However, a slight increase would not take the Bank of Canada out of the way of easing, while 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 are unanimous in predicting no change in borrowing costs, how the governor characterizes the trajectory could rattle Japan’s currency, which has already spooked yen traders by outperforming its peers so far this month.

Elsewhere, China’s 1-year medium-term borrowing and lending rates are expected to remain unchanged, and Indonesia’s central bank will keep its policy rate steady for a fifth month. Taiwan authorities decide on the discount rate on Thursday.

On the data front, Japan’s key measure of consumer inflation is seen slightly higher in August, supporting the case for the BOJ to anticipate a rate hike 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 less than the previous quarter.

Europe, Middle East, Africa

More central bank decisions are scheduled as a result of possible Fed easing. Given their reliance on dollar-denominated energy exports, the Gulf states could automatically follow the US lead with rate cuts of their own.

Here’s a rundown of other announcements coming up in Europe, the Middle East and Africa, mainly on Thursday:

• While no rate change is expected from the BOE, investors are awaiting a crucial decision on whether it will accelerate the liquidation of its bond portfolio to keep bullion sales steady ahead of a year when an unusually large amount of debt comes due. Indications of the pace of future interest rate cuts will also be eagerly awaited amid speculation that officials will soon accelerate easing to help the economy.
• Norges Bank is holding its deposit rate at 4.5%, with analysts focusing on any adjustments to forecasts for easing early next year. While slowing inflation has increased bets on a first rate cut in December, Norwegian officials are likely to stick to their tough stance, with the labor market robust and the krone near multi-year lows.
• The central banks of Ukraine and Moldova are also scheduled for decisions.
• Turning south, Turkey’s central bank is set to hold its key rate at 50% for the sixth straight meeting as it waits for inflation to ease further. The pace of annual price growth has eased from 75% in May, but remains at 52%. Officials hope to approach 40 percent by the end of the year.
• With data on Wednesday expected to show South African inflation fell to 4.5% in August, the central bank could cut borrowing costs for the first time since 2020 a day later. Governor Lesetja Kganyago said the institution will adjust rates once price growth is firmly at the 4.5 percent midpoint of its target range, where it prefers to anchor expectations. Forward-rate agreements, used to speculate on borrowing costs, fully price in the chance of a rate cut of 25 basis points.
• Angola’s decision may be a close call between a trip and a hold. While inflation is easing, the currency has weakened nearly 7% since August against the dollar.
• On Friday, Eswatini, whose currency is pegged to the South African rand, is expected to follow its neighbor and cut rates.

Elsewhere, comments from European Central Bank officials can be scrutinized for any clues about the path of future easing after a second cut in borrowing costs. Several governors are scheduled to appear, and President Christine Lagarde will give a speech in Washington on Friday.

Speaking at the weekend, polite policy makers Joachim Nagel and Pierre Wunsch warned that the ECB needed to remain alert on inflation, even as the latter acknowledged that more rate cuts were likely if the baseline scenario of central bank will be realized.

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

Heading south, data on Sunday showed inflation in Israel accelerated more than expected last month to 3.6 percent year-on-year as the war in Gaza strains the economy and government spending rises.

In Nigeria on Monday, data is likely to show inflation slowed for a second straight month in August to 32.3%. So the price impact of a currency devaluation and the temporary removal of fuel subsidies last year continues to trickle down.

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

latin america

Brazil’s central bank meets against a backdrop of an overheating economy, above-target inflation, loose CPI expectations and government fiscal largesse.

Putting it all together, investors and analysts expect to see tighter monetary policy for the first time in 3 1/2 years on Wednesday. Consensus is for a 25 basis point hike to 10.75%, with another 75 basis points of tightening to follow by the end of the year, taking the key rate to 11.5%.

Colombia’s July sixth economic reports should highlight the resilience of domestic demand, which is causing analysts to mark down their growth forecasts for the third and fourth quarters.

The pace of retail sales could be based on June’s positive print, which snapped a 16-month decline, while early consensus has GDP proxy data showing a rebound in activity after June’s mild decline.

Paraguay’s rate-setting authorities are running into inflation just above the 4% target. Analysts polled by the central bank see a cut of 25 basis points by the end of the year.

After about 10 months of President Javier Milea’s so-called shock therapy, this week will provide some telling data on the state of Argentina’s economy.

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

Meanwhile, data for Peru released on Sunday showed the economy grew significantly in July, resuming a recovery that had stalled abruptly a month earlier.