Week Ahead for FX, Bonds: Fed to Start Cutting Interest Rates in Busy Week For Central-Bank Decisions

Below are the most important global events likely to affect FX and bond markets in the coming week starting September 16.

All eyes will be on the U.S. Federal Reserve, which is widely expected to start cutting interest rates albeit amid uncertainty over whether it will opt for a small or a big reduction.

Rate decisions are also due in the U.K., Brazil, Norway, Turkey and South Africa, while in Asia announcements from the Japanese and Chinese central banks take center stage, alongside decisions in Taiwan and Indonesia.

U.S.

The Federal Reserve is widely expected to start cutting interest rates for the first time since 2020 at its meeting on Wednesday but a question mark remains over whether it will opt for a traditional 25 basis-point cut or favor a chunky 50 basis-point reduction.

A recent article in The Wall Street Journal described the decision as "a close call" after Fed Chair Jerome Powell said in a speech at Jackson Hole last month that the time had come to cut rates and expressed some concern about a worsening U.S. labor market.

"The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks," Powell said at the time.

U.S. money markets currently price in around a sizeable 43% chance of a 50 basis-point rate next week, leaving a slightly bigger likelihood of a 25-basis-point reduction, aaccording to LSEG Refinitiv data.

"If pricing stays where it is currently, it would be the first meeting in years where there's serious uncertainty about the rates decision," Deutsche Bank analysts said in a note.

Investors will also pay close attention to the Fed's new interest-rate forecasts, known as the 'dot plot', particularly given that markets are currently pricing in a total of 114 basis points of rate cuts for the final three meetings of 2024 in September, November and December.

A big gap between the Fed's forecasts and money-market pricing would be "a potential stumbling block for the bond price rally," said Elmar Voelker, senior fixed income analyst at LBBW, in a note.

Uncertainty over the interest-rate outlook means investors will continue to scrutinize any hints about the economic situation within upcoming data.

Ahead of the Fed's decision, the Empire State manufacturing survey for September is due on Monday; industrial production and retail sales data for August on Tuesday; and August housing starts figures on Wednesday. Any weakness could add to expectations for a larger rate-cut.

Weekly jobless claims figures and August existing home sales data are due for release on Thursday.

The U.S. Treasury will auction $13 billion in 20-year bonds on Tuesday and $17 billion in ten-year inflation-protected notes, or TIPS, on Thursday.

CANADA

Canadian data will continue to be scrutinized after the Bank of Canada again cut interest rates in September, with more expected in the coming months given a weakening economy and slowing inflation. Markets see a possibility of a larger 50 basis-point reduction in future.

Focus in the coming week will center on inflation data for August on Tuesday.

Analysts at TD Securities expect three consecutive 25 basis-point cuts in Oct, December and January,

The central bank's message in September "suggests a shift in its reaction function that lowers the threshold for cuts going forward, although we still believe that markets are overpriced for near-term easing, and we do not expect the BOC to deliver 50 basis-point cuts," the analysts said in a note.

BRAZIL

Brazil's central bank announces a rate decision on Wednesday and is expected to initiate another cycle of rate hikes, raising the selic rate from its current level of 10.5%, due to a worsening inflation outlook.

"It seems the market is pricing and needs a hawkish hike from Brazil's central bank. Any reference to 'gradualism' or an unclear path on the extent of the tightening cycle could hit the real," ING analyst Chris Turner said in a note.

EUROZONE

The European Central Bank cut interest rates for a second time in September and most analysts expect it will wait until December before cutting them again, especially given elevated services inflation.

However, a back-to-back rate reduction in October isn't out of the question, especially given concerns about a faltering eurozone economy and this will mean there will continue to be heightened focus on upcoming economic data.

The German ZEW sentiment survey for September is likely to show a third consecutive decrease in growth expectations, UniCredit analysts said in a note.

"The key driver is concern about the export-dependent German manufacturing sector, especially the car industry after the recent announcement of Volkswagen of possibly shutting down plants in Germany," they said.

Further forward-looking confidence indicators will be watched on Friday, with the French business confidence survey and the eurozone flash consumer confidence indicator due for release. Final figures for eurozone August inflation are scheduled for Wednesday.

Germany will reopen 2053- and 2054-dated Bunds in auctions on Wednesday, followed by auctions of Spanish and French government bonds on Thursday. Among the eurozone's smaller issuers, Slovakia lines up for an auction on Monday, Finland on Tuesday and Greece on Wednesday.

U.K.

The Bank of England announces a decision on Thursday and is widely expected to keep its key interest rate on hold at 5.0%. The BOE cut interest rates in August but only in a very close 5-4 vote and policymakers are likely to consider services and wage inflation to be too elevated to justify back-to-back reductions.

UniCredit analysts point to previous comments from BOE Governor Andrew Bailey that the central bank would not cut rates "too much or too quickly."

"We interpret it [Bailey's comment] to mean that the committee was, at the time, not minded to cut again in September," they said, adding that macro data since the August decision are unlikely to have changed policymakers' minds.

The Bank of England will also announce plans for its quantitative tightening program-the sale of gilt holdings purchased previously under the Asset Purchase Facility-for the 12-month period starting in October.

"Our assumption is that the vote will be to reduce the stock by 100 billion pounds ($130 billion) over the year, requiring 13 billion pounds of active gilt sales," Bank of America analysts say in a note.

Ahead of the central bank's decision, close attention will be paid to U.K. inflation figures for August on Wednesday. On Friday, focus will turn to evidence on the state of the economy, with the latest GfK consumer confidence survey for September due, followed by retail sales and public finances data for August.

The U.K. Debt Management Office plans to auction the July 2054 gilt on Tuesday and the July 2033 green gilt on Wednesday.

SCANDINAVIA

Norway's Norges Bank is widely expected to keep interest rates steady at 4.5% in a meeting on Thursday, with its rate path likely showing a first rate cut in December.

Analysts at SEB said in a note that inflation has been consistently lower than Norges Bank forecasts, while "lower growth, declining oil prices and lower rate expectations abroad should pull the rate path lower." The "perpetually weak" Norwegian krone partially offsets this effect, however, they said.

Handelsbanken analysts warned that although Norges Bank's rate path will likely be downgraded, it will still show fewer anticipated rate cuts than markets are pricing in. Handelsbanken expects the forecasts won't fully reflect a rate cut until March next year, with only a slight possibility of a December cut, while money markets price in at least one rate cut by the end of this year and more than three by end-March 2025, the analysts said.

ING currency analyst Francesco Pesole said the Norwegian krone could extend its recent rise if the Norges Bank sounds cautious about rate cuts next week.

Denmark will conduct a bond auction on Wednesday, while Sweden is set to sell inflation-linked bonds on Thursday.

SOUTH AFRICA

South Africa announces a rate decision on Thursday, where it could opt for its first rate cut of this cycle.

TURKEY

Turkey's central bank announces a rate decision on Thursday. The key rate is expected to be left at 50.0%.

JAPAN

The Bank of Japan is widely expected to maintain interest rates at 0.25% at the end of its two-day meeting on Sept. 20 as it examines the effects of its July rate increase. All eyes are on a post-meeting press conference by BOJ Gov. Kazuo Ueda for any hints on further policy action.

The consumer-price index for August, due on Sept. 20 ahead of the BOJ meeting, is expected to show that inflation remains well above the bank's 2% target. Core CPI, which excludes fresh food prices, is expected to have risen 2.8% from a year earlier, according to economists surveyed by data provider Quick.

Investors will also closely watch August trade data and July machinery orders, both due Wednesday, to measure the strength of external demand amid growing concerns over the global economic outlook.

CHINA

The main event is the People's Bank of China's loan prime rate announcement on Sept. 20. Prior to that, the PBOC will announce the rate on its medium-term lending facility, a liquidity-management tool that is taking on a diminished role under the central bank's policy revamp.

Some economists see scope for more monetary policy easing in the near term to help aid the economy as weak demand and unbalanced growth persist. However, given narrowing interest margins for banks--a challenge acknowledged by central bank officials, economists think the LPRs, benchmark lending rates tied to many corporate and household loans, will remain unchanged.

Foreign direct investment data for August is also expected, and will likely show a continued outflow of foreign capital, according to analysts, as China's economic woes keep investors wary.

SINGAPORE

On Tuesday, Singapore will release data on non-oil domestic exports for August, which will show how the open economy's trade is faring midway through the third quarter.

Market participants will be watching to see if exports have remained in growth territory from July, with the key electronics sector an area of focus.

TAIWAN

Taiwan's central bank makes its rate decision Thursday against a backdrop of efforts to cool the property market as it keeps a watchful eye on inflation.

After surprising markets with a rate hike in March to guard against inflation risks, the Taiwanese central bank has since held rates steady as the island economy benefits from exports-led growth. For many analysts, the March hike seems to be a case of one and done.

Goldman Sachs analysts expect the central bank to maintain a neutral policy stance for some time, noting comments from the bank's governor saying that the timing of rate cuts will depend entirely on inflation.

INDONESIA

Indonesia's central bank could be set to start its policy pivot Wednesday.

A backdrop of softer domestic economic growth and cooling inflation, plus the Fed's own expected pivot, have some analysts seeing a clearer path for cuts in Indonesia. Bank Indonesia's governor has been hinting at room for cuts in the fourth quarter but also stressed that its focus for the third quarter is on cementing the rupiah's stability.

That has some other analysts wondering if it will continue to wait for the Fed's dust to clear before making a move. ANZ expects Bank Indonesia to keep its policy rate unchanged, though it thinks the decision will be a close call.

MALAYSIA

Malaysia will publish exports data for August on Thursday. Economists expect export growth last month to be significantly lower than in July but still in the mid-single-digit range, partly due to last August's contraction.

Continued strength in Malaysian exports will add to signs that the economy is on firm footing, supporting expectations that full-year growth will show a solid recovery.

AUSTRALIA & NEW ZEALAND

In Australia, bond traders will focus on the release of August employment data Thursday, with any sudden rise in the jobless rate likely to quickly reshape bets on the next move in interest rates.

The Reserve Bank of Australia has indicated it believes conditions in the job market remain tight overall, and is forecasting a gradual rise in unemployment over coming months. If the upward trajectory of the unemployment rate gathers pace, talk of an interest-rate cut before the end of the year may gain traction.

In New Zealand, economic growth data for the second quarter on Thursday is set to confirm that the economy is in the doldrums, supporting forecasts that the Reserve Bank of New Zealand will likely cut the official cash rate aggressively over coming months.

Most economists are expecting a sizable contraction in the economy over the quarter, extending a lengthy recession.

Any references to days are in local times.

• Additional reporting by James Glynn, Amanda Lee, Kimberley Kao, Grace Zhu, Ying Xian Wong, Megumi Fujikawa, Emese Bartha, Miriam Mukuru, Renae Dyer and Dominic Chopping

Write to Jessica Fleetham at jessica.fleetham@wsj.com and Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com

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