Recent data from a Reuters poll indicates that economists are expecting a slowdown in headline Year-over-Year (YoY) inflation, with estimates showing a decrease to +2.6%, down from +2.9% in July. This trend is driven by softer data over the past four months. Core inflation, which excludes energy and food components, is anticipated to remain steady at +3.2% YoY. Despite this, Month-over-Month (MoM) inflation for both headline and core is projected to increase by +0.2%, mirroring July figures.
The Federal Reserve is currently grappling with the decision of whether to implement a 25 or 50 basis point cut in response to the economic landscape. While recent inflation numbers may suggest a need for a rate cut, other indicators show resilience in the economy. Unemployment has fallen to 4.2%, real GDP is growing at a rate of +3.0% in Q2 2024, and there are no clear signs of a looming recession. This implies that a larger 50 basis point reduction may not be necessary at this point.
On the other side of the Atlantic, the European Central Bank (ECB) is expected to lower all three benchmark rates at its upcoming meeting. With headline inflation hovering near the central bank’s target of 2.0%, markets are anticipating a 25 basis point reduction this week, followed by another cut possibly in December. The Euro Area’s Consumer Price Index (CPI) inflation dipped to +2.2% YoY in August from +2.6% in July, the lowest level since mid-2021. However, core inflation remains elevated at +2.8% YoY, indicating a more sustained upward trend.
The ECB’s decision on rate cuts will be influenced by a combination of factors, including sticky services inflation, elevated wage growth, and overall economic growth. While core inflation has averaged +2.9% throughout the year, negotiations around wage increases have slowed slightly in Q2 2024. This, coupled with uncertainties in economic forecasts, may limit the ECB’s ability to raise rates more than twice in the current year.
Alongside the rate decisions, the central banks will also provide economic forecasts and forward guidance in their statements. Analysts are closely monitoring any potential revisions in inflation, wage growth, and GDP projections. Market participants are pricing in a total of 63 basis points in rate cuts by the end of the year, reflecting expectations of further monetary easing measures. The overall tone of the central banks’ guidance will play a crucial role in shaping market sentiment and investor decisions in the coming months.
The dynamic interplay between inflation trends, economic indicators, and central bank policy decisions highlights the delicate balance that policymakers must navigate. The evolving economic landscape calls for a nuanced approach to monetary policy, considering both short-term challenges and long-term sustainability. As investors wait for the central banks’ announcements, the broader implications of rate cuts and inflation dynamics will continue to shape market sentiment and asset valuations in the near future.