Friday The 13th: The Cutting Cycle

A Return to Rate Cuts

There's a buzz in the market as speculation about a 50 basis points (bps) rate cut by the Federal Reserve next week resurfaces. This follows reports by the Financial Times and the Wall Street Journal suggesting a tight race between a 25 and 50 bps cut. Former FOMC member Bill Dudley also added fuel to the fire by stating a strong case for a 50 bps cut.

Those advocating for rate cuts are making a comeback after years of being sidelined by inflation. Now that central banks are nearing their inflation targets, rate cuts are back on the table. The European Central Bank (ECB) has already made a move, and it's expected that the Fed will follow suit next week.

Rate Cut Expectations

At the beginning of the year, the market was expecting the Fed to have already made a 100 bps cut. However, the ECB's recent 25 bps cut to the deposit facility rate to 3.50% was as expected. According to ECB observer Bas van Geffen, the 60bp cut to the main refinancing rate and marginal lending facility rate was merely a reflection of the technical adjustment to the policy rates corridor, communicated in advance.

Uncertain Outlook

The ECB's rate cut was justified by progress in inflation, but the future remains uncertain. The staff's projections are largely unchanged from the June forecast, suggesting no need for a change in pace. It's believed that the ECB will skip October and make another cut in December. The projections also suggest a slightly lower terminal rate may be achieved in 2025, but it's maintained that the ECB is overlooking geopolitical and trade risks next year.

US PPI Figures and Jobless Claims

The US Producer Price Index (PPI) figures for August were slightly higher than expected, but there were downward revisions for July. The categories of the PPI used in the calculation of the PCE deflator were mild. The US initial and continuing jobless claims were largely as expected and have been moving sideways at the turn of the month. This suggests that the labor market is somewhat stronger than at the end of July.

Bottom Line

The return of rate cuts is stirring up the financial markets, with the ECB already making a move and the Fed expected to follow. The uncertainty around the future, however, raises questions about the pace and timing of these cuts. What are your thoughts on this development? Do you think the market's expectations for rate cuts are justified? Share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.