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Take Five Go Big or Go Home

Take Five: Go Big or Go Home

More interest rate cuts are set to come in Switzerland and Sweden after a supersized Federal Reserve rate move, with U.S. inflation data and global business activity surveys charting the pressure ahead.

In politics, Japan’s ruling party is picking its next leader, who will become prime minister, and Sri Lankan voters have chosen a president.

Here is your week-ahead primer on world markets.

1/ FRONT-LOADERS

Central banks in Sweden and Switzerland are next up in the Great Rate-Cutting Race of 2024.

Market participants expect both to lower benchmark rates at their meetings on Wednesday and Thursday respectively, and there is a high chance they could front-load cuts this year, meaning 2025 might see comparatively little in the way of policy easing.

The Swiss National Bank was the first major central bank to cut rates back in March. Markets are split on the size of a cut on Thursday. Appreciation in the franc, which is near its strongest since 2015, is precisely what the SNB does not want right now, given inflation already lags behind its projections.

Meanwhile, Sweden’s Riksbank is all but certain to deliver a 25 basis point cut on Wednesday, especially as the inflation rate is now well below the bank’s target, with a strong possibility of a 50 basis point cut in November.

2/ INFLATION IN FOCUS

The Fed’s favorite inflation indicator – due on September 27 – will show if price pressure has continued to moderate even as the Fed finally started to pull back from the restrictive monetary policy that has been in place to cool the economy.

The personal consumption expenditures (PCE) price index for August likely climbed 2.5% on an annual basis, a Reuters poll showed.

The bank’s latest economic projections put the annual rate of the price index falling to 2.3% by year-end and 2.1% by the end of 2025.

Investors will also get fresh numbers on consumer confidence and durable goods in the week to come.

3/ RECESSION WATCH

Flash business activity data, released from Monday onward, will provide the latest snapshot of the state of the world economy.

Euro zone business activity contracted sharply and unexpectedly this month as the bloc’s dominant services industry flatlined, while a downturn in manufacturing accelerated, a survey showed on Monday.

Markets appear happy, for now, that the Fed’s half-point rate cut will help avert a U.S. recession, and so a global one. Economists polled by Reuters reckon the recession probability is around 30%, a figure little changed all year.

But it’s not all rosy.

In European powerhouse Germany, the PMI moved deeper into contraction territory below the 50 mark in August and sentiment is weak. And not to forget a Chinese economy that is still struggling will hurt others.

4/ PICKING A PREMIER

Japan’s ruling party picks its new leader and, by extension, a new prime minister on September 27. It’s a crowded field of nine with three seen as frontrunners though with very different policy views.

Sanae Takaichi – who would become the nation’s first female premier – is a reflationist who has accused the Bank of Japan of raising rates too soon. In contrast, Shigeru Ishiba is past monetary stimulus critic and told Reuters the central bank is “on the right policy track” with rate hikes thus far. So far, Shinjiro Koizumi, son of charismatic ex-premier Junichiro Koizumi, has only said he will respect the Bank of Japan’s independence.

The leadership race complicates the bank’s job – no matter who wins. A snap election is likely in late October, making policy action at that month’s meeting difficult.

5/ TOO CLOSE TO CALL

Sri Lankan voters have elected leftist leader Anura Kumara Dissanayake, who has promised change for the debt-saddled South Asian country.

While the island’s economy has clawed back from the abyss – and is set to return to growth next year – the austerity and struggle citizens endured drove many away from incumbent Ranil Wickremesinghe.

Investors worry that the Marxist-leaning Dissanayake’s desire to revisit the terms of the nation’s International Monetary Fund bailout could delay future disbursements and that he could seek to renegotiate a debt deal with bondholders finalized last week.

(Source: ReutersReuters)