Context
Last week was dominated by the Federal Reserve’s policy meeting, where the central bank delivered its first interest rate cut (25 basis points) this year and signaled two more for the remainder of the year. It became clear from Chair Powell’s press conference that policymakers are facing a complex outlook, with challenges to both aspects of their mandate. The Chair’s remarks added to the sense of division and confusion within the FOMC, eroding the initial comfort with a Fed decision that also limited dissent to just one FOMC member, from the newly-appointed Governor Miran.
The sense of complexity was reinforced by the manner in which FOMC members revised their economic and interest rate projections (the SEP and the “dot plot”). The former, involving higher inflation and growth forecasts, appears on the surface to be at odds with the decision to cut rates. The latter highlights a significant amount of dispersion in views about the path for policy rates, for both the short and longer term.
All of this mattered little to stock market investors, who remain comfortable separating sovereign issues from corporate ones. Stock market indices hit new record highs, including the first one for the Russell since 2021, and credit spreads continued to tighten.
Government bond market yields went up, and the curve steepened after the Powell press conference, a trend reinforced by the economic data that followed. That said, markets are pricing in an end-2026 Fed policy rate that is well below the Fed’s medium-term forecast, while the longer end of the government bond market is increasingly aware of the authorities’ possible desire to “bend the curve” down the road. This could involve measures from both the Treasury Department and the central bank.
While on the Fed, media reports pointed to a growing political push for reforms—this as President Trump asked the Supreme Court to allow him to fire Governor Cook.
Elsewhere, the miss in the U.K.’s monthly fiscal data served as a stark reminder of the challenges facing the British government as it formulates its much-anticipated November budget. This followed a relatively high inflation print (3.8%, with food and service inflation at 4.8% and 4.7%, respectively) and the Bank of England’s decision to refrain from cutting rates.
In Europe, former Prime Minister Draghi delivered a strong warning against policy complacency. Noting that “one year on [since the issuance of his report on reforms], Europe is… in a harder place,” he urged policymakers to take steps against a growth model that “is fading,” vulnerabilities that “are mounting,” and “inaction [that] threatens not only our competitiveness but also our sovereignty itself.”
China’s economic data surprised on the downside for both supply and demand measures. Meanwhile, while differing in detail, both the American and Chinese readouts of their presidents’ call were described as relatively constructive.
Finally, FX-adjusted data showed that while foreign investors continue to invest in U.S. equities, they are increasingly hedging their dollar exposure. This is happening as global investors have shifted their overall dollar shorts to a range of emerging market currencies.
This Week
The Fed watch continues this week with many scheduled remarks by officials, including Chair Powell and Governor Miran, as well as the release of PCE inflation data, widely known as the central bank’s favorite inflation gauge. Analysts will be particularly interested in hearing different perspectives on last week’s policy deliberations and how various officials view the economic and policy outlook.
Also, look for the release of data on personal income and spending, together with trade, UMich consumer confidence, and, of course, the weekly jobless claims. This last one will be particularly closely watched in light of last week’s big jump.
Elsewhere …
Argentina: A lot of Argentine economic data will be released at a time when authorities have deployed their reserves in size to counter depreciation pressure on the currency that could undermine progress on inflation.
Brazil: Brazil releases its quarterly monetary policy report with updated economic projections, as well as the minutes of its recent central bank policy meeting, which will shed light on the factors that kept the high policy rate (15%) unchanged.
China: Watch for industrial profits at a time of pressure not only on corporate supply and demand, but also on fiscal support.
Eurozone: Look for lots of PMI and consumer sentiment data, as well as Germany’s widely watched business confidence measures and remarks from ECB officials.
Japan: Look for household spending and inflation data.
Mexico: Further north, look for the Mexican central bank to cut interest rates for the tenth consecutive time.
Switzerland: The SNB will be a focus, with questions on whether it is willing to revisit negative interest rates.
