Macroeconomics: The Day Ahead for 17 September

Today is all about the Fed rate decision, even though there are also rate decisions in Canada, Brazil and indeed Ghana, while UK CPI tops the statistical agenda, with South Africa and final Eurozone CPI and US also Housing Starts ahead, as Japan and Singapore trade data are digested. US president Trump starts a state visit to the UK, which will include some further trade negotiations (above all on steel) and the partnerships on science and defence technology, and nuclear power), but unlikely to benefit PM Starmer, whose position is under siege following the dismissal of Lord Mandelson as US ambassador last week. There is also a busy run of ECB speakers, and General Mills tops a modest run of US corporate earnings.

** U.K. – August CPI **

– CPI readings were broadly in line with forecasts, with headline remaining elevated but unchanged at 3.8% y/y, while core slipped to 3.6% y/y from 3.8%, paced by a reversal of July’s Services CPI back down to 4.7% after July’s bump higher to 5.0%, largely reflecting volatile air fares. Food, administered prices and restaurants/hotels remain the primary drivers of UK inflation, the latter a function of the Employer NI contribution and minimum wage hike, rather than being demand driven. The simple point is that while the UK has considerably higher inflation than its G7 peers, it is not indicative of broader inflation pressures, and keeping BoE Base Rate at elevated levels will do precisely nothing to bring it down. Per se the case for the BoE desisting from a path of further modest and cautious rate cuts is not made.

** U.S.A. – FOMC rate decision **

– A 25 bps rate cut to 4.0-4.25% is pretty much baked in the cake, following Powell’s signal at Jackson Hole and a host of other Fed speakers comments. However the vote will be crucial in terms of market reaction, along with the ‘dot plot’. Many expect Waller, Bowman and ‘new boy’ Miran all to dissent in favour of a larger 50 bps cut, with Powell’s consensus building skills likely to stave off the risk of a three way vote split, which might have seen one or other regional Fed president voting for no change, largely because it would make policy signalling even more difficult, than the dovish dissents will already contribute to. It could however be argued that a no change dissent would at least signal a degree of defiance to the unrelenting political pressure from the White House and Treasury. Yesterday’s solid Retail Sales, better than expected Manufacturing Output and the elevated level of headline and core inflation do beg the question of how sensitive the Fed should be to the weak Payrolls readings in assessing the risks to the economic outlook, and given its dual pillar mandate. Powell will also face some tough questions on the ‘third pillar’ to pursue “moderate long-term interest rates” that has been put in play by both Miran and Treasury Secretary Bessent, which will also play into reaction to any further decisions to reduce its balance sheet reduction programme (QT). The ‘dot plot’ is expected to see end 2025 rate held at 3.75-4.0% (i.e. one further cut), but 2026 and 2027 end year rates cut 25 bps respectively to 3.25-3.50% and 3.0-3.25% respectively, with the long run rate held at 3.0%. There will be many that criticize those changes as a clear signal of political interference, and doubtless cry foul were the long run estimate to be cut. All the more so, if there were any signals from Powell suggesting the Fed’s willingness to help pursue lower long-term yields, seemingly unlikely other than saying the Fed remains determined to bring down inflation to target, which all things being equal would facilitate lower long-term nominal rates. There is little doubt that this is a watershed moment for the future of monetary policy, and the post mortem will be extensive, and initial market reactions likely volatile, and probably misleading.

** Canada – Bank of Canada rate decision **

– Ahead of the FOMC meeting, the BoC is expected to resume its rate cuts, with a further 25 bps cut to 2.50%. Incoming data have made a convincing case for a further move with worse than expected labour market readings (Unemployment Rate up 0.1 ppt to 7.1%, while Employment fell -65.5K against forecasts of +5K). CPI fell -0.1% m/m, even if base effects pushed the y/y back up to 1.9%, while core measures remain elevated at 3.0/3.1%, but held steady, and monthly GDP slowed more than expected to -0.9% y/y, posting a second m/m decline of -0.1% m/m. Given the clear signs of a singificnt drag from tariffs and trade tensions with the USA, the door will cautiously be left open to at least one further cut, with markets currently pricing one more 25 bps cut by March 2026.