[News] Key Focus This Week: U.S. Monetary Policy — Divergence in Market Expectations on Fed Rate Cut Size

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Weekly Market Review:

Last week, a rebound in technology stocks propelled the S&P 500 to a 4% gain, positioning it to once again challenge historical highs. U.S. 2-year and 10-year Treasury yields continued to decline, reflecting expectations of Federal Reserve rate cuts, and the spread between the 10-year and 2-year Treasury yields widened to approximately 10 basis points. Meanwhile, the U.S. Dollar Index fluctuated around the 101 level.

 

Key Economic Data Review:

China CPI: China’s Consumer Price Index (CPI) increased by 0.6% year-over-year in July (previous: 0.5%). The rise in August was similarly influenced by extreme weather conditions, which drove food prices higher. Excluding food and energy, the core CPI stood at 0.3% (previous: 0.4%). Regarding the Producer Price Index (PPI), August’s PPI decreased by 1.8% year-over-year (previous: -0.8%), marking the 23rd consecutive month of decline. This indicates that deflationary pressures in China are persisting and showing signs of intensification.

 

United States CPI: U.S. CPI increased by 2.5% year-over-year in August (previous 2.9%), with a monthly rise of 0.2% (same as the previous 0.2%). Breaking down the components, the year-over-year growth rate of housing services prices rebounded to 5.2% in August (previous: 5.1%). However, due to energy prices declining by 4% year-over-year (previous: +1.1%) pulled the overall CPI lower. Core CPI remained steady at 3.2% year-over-year (same as the previous 3.2%), with a monthly increase of 0.3% (previous 0.2%). Both CPI and core CPI annual growth rates were the lowest since February 2021.

 

Eurozone Monetary Policy: In its September policy meeting, the European Central Bank (ECB) decided to cut the deposit facility rate by 25 basis points to 3.5% and announced the narrowing of the interest rate corridor, effective from September 18. The main refinancing rate and marginal lending rate were lowered by 60 basis points, reducing their respective spreads to 15 and 25 basis points relative to the deposit facility rate. On the economic outlook, the ECB raised its core inflation forecast for 2024 to 2026 to 2.9%, 2.3%, and 2.0% (June forecasts: 2.5%, 2.2%, and 1.9%), citing stronger-than-expected service sector inflation. However, due to restrictive financial conditions dampening private consumption and investment, the ECB lowered its economic growth projections for 2024 to 2026 to 0.8%, 1.3%, and 1.5% (June forecasts: 0.9%, 1.4%, and 1.6%).

 

Key Data to Watch This Week:

U.S. Retail Sales (9/17): U.S. retail sales grew by 2.7% year-over-year in July (previous 2.0%), with a monthly increase of 1% (previous -0.2%). The July rise was largely driven by a 4% rebound in auto sales, reflecting recovery from the June slowdown caused by a cyberattack. The market expects August retail sales to normalize, with year-over-year growth slowing to 2.2% and a monthly increase of 0.2%.

 

U.S. Monetary Policy (9/19): During the Jackson Hole symposium, Federal Reserve Chair Jerome Powell signaled that the time for policy adjustments had arrived, raising market expectations for a rate cut at the upcoming meeting. However, recent mixed U.S. economic data have created uncertainty regarding the size of the rate cut. According to Fed Watch data, the probabilities of a 25-basis-point and 50-basis-point cut are both at 50%.

 

Japan Monetary Policy (9/20): After the Bank of Japan raised rates in July and indicated that it would refrain from further hikes in times of market instability, the market expects the BOJ to hold rates steady at this meeting, with the possibility of another rate hike in October or December.

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(Photo Crited: Pixabay )