The Bank of Japan (BOJ) has pushed out the timing of its next interest rate hike beyond October on increased fears about downside risks to the US economy and to avoid domestic political issues related to the upcoming change in Japan’s ruling party leadership.

The decision reflects an important shift in strategic thinking by the BOJ and favors a later move by the BOJ, either at the December 18-19 meeting or into next year if the BOJ’s fears about the US are realized.

Consumption: Notably absent in the PBoC package was coordination with the fiscal side with a plan to directly stimulate sagging consumption. But we suspect and have written that this will likely be forthcoming.

Political messaging aside, Premier Li said that service consumption should be improved in terms of both “scale and quality,” and differentiated support policies should be developed to suit the needs of different groups to fully unleash consumption potential.

To that effect, our understanding is that Li has ordered the NDRC (National Development and Reform Commission) and the Ministry of Finance to study the feasibility of issuing 1 trillion yuan to stimulate consumption.

More specifically, if the economy does not perform as expected in the third quarter, especially in August and September, the central government may issue 1 trillion yuan mainly for low- and middle-income earners to stimulate domestic demand.

With the Reserve Bank of Australia (RBA) all but certain to stand pat at this week’s policy meeting following last week’s news of sharply stronger-than-expected jobs growth, we guide clients to looks for clues as to whether the Bank opts to leave any rhetorical room to cut rates before the end of the year.

We maintain our view that the RBA’s current policy stance and recent commentary do retain room for the Bank to shift to an easing bias and reduce rates before year’s end, even if RBA Governor Michele Bullock maintains a hawkish posture at this week’s post meeting press conference.

China’s political leadership is aware that the urgency has significantly increased for a cut in the Reserve Requirement Ratio (RRR) for banks, in the very near future, which coordinated with strengthened fiscal support would alleviate pressure on China’s commercial banks and mitigate the impact of a large volume of maturing medium-term lending facilities on market liquidity.

The PBoC is also likely to cut rates further in the very near future, which could mean the closing days of September, and introduce additional policy measures to reduce financing costs for enterprises and households, all within the mantra of maintaining “reasonable and sufficient liquidity,” but now also in accordance with the dictate of “sooner rather than later.”

We would push back against any narrative that the Fed rate cut made an ensuing PBoC move politically awkward, as the Fed’s shift in policy stance in fact creates more favorable conditions for China to cut interest rates.

The PBoC will soon opt for more easing as the US is poised for an interest rate cut cycle, and as headwinds are emerging amid efforts to stabilize domestic economic momentum.

The remaining days of this month may still be the window in which China cuts the RRR, and lending rate, as it continues to seek to mitigate the financial burden on the public of outstanding mortgages.

The Bank of Japan (BOJ) will likely sit tight on rates at its September 19-20 policy meeting as the country gears up for a change in political leadership and the US Federal Reserve kicks off its easing cycle.

The BOJ, having pulled nominal rates out of negative territory in March for the first time in 17 years, is in a good place. It lifted the policy rate to 25 bps in July, with officials pledging follow-up moves as long as the economy continues to track to its projections. It will get a fresh inflation reading on day two of its policy meeting.

Shifting expectations for US rates which coincided with the huge unwind of yen-related carry trades produced just the kind of level-shift higher in the yen that authorities had been seeking for months – even if a bit volatile.

Its July hike also reduced the urgency for additional immediate action and has allowed the BOJ a little breathing room to monitor whether rising wages – which now importantly includes the first rise in real wages in 28 months – are helping to cement the long sought-after virtuous cycle between wages and prices.

Stalled UK growth and slowing wages are setting the stage for Bank of England Governor Andrew Bailey to push for more easing this year. If upcoming inflation data improve, he could hint at a series of rate cuts extending through next year.

While our base case remains that the majority on the monetary policy committee (MPC) will coalesce around November for another 25 basis point cut in Bank Rate to 4.75%

Skipping a September cut gives the BOE a clear path to announce and explain a decision to further reduce its gilt sales over the next 12 months by as much as 100 billion sterling ($130 billion).

The MPC next week will vote on a target for a reduction in the stock of UK government bonds for the period beginning in October and running through September next year.

This week’s FOMC meeting

We expect that the Fed will cut rates 50bp this week. The Fed could have let sleeping dogs lie last Thursday and left market pricing decaying toward a 25bp cut, but it allowed for a repositioning of expectations toward 50bp. There hasn’t been an effort to push back on that pricing. Note that it may be a struggle to move market pricing to 80% or higher odds of 50bp. The Fed would need more direct communications now given Waller’s hard signals before blackout. We know many clients and analysts will have a hard time letting that go, which we understand. If pricing holds near 60-40 in favor of 50bp, the Fed has an opportunity for a dovish surprise, which would be a helpful push in counteracting a weakening labor market.

The FOMC statement will be reset to match policy. The Fed has let the FOMC statement languish in its role as a policy guide.

If the Fed cuts rates to protect the employment mandate, and expects further rate cuts, it can’t say the risks are in balance anymore. It was already silly to retain this language in July when participants effectively decided on a September rate cut. The subsequent paragraph will change to reflect the rate cut and the expectation of additional cuts at subsequent meetings. We expect there will be a reference to preventing further “unwelcome” softening in the labor markets.

We anticipate limited if any dissents. If the Fed can arrive at the conclusion that the labor market is deteriorating or at the verge of deterioration, there will be universal agreement that the Fed is embarking on a series of rate cuts, and at that point participants really shouldn’t have high conviction that pulling one of those cuts forward is a major policy error. Generally, a participant needs to have real conviction to dissent.

We believe the SEP will reveal a total of 100bp of rate cuts for 2024.

We also believe that Powell is the driving force behind a last-minute shift to a 50bp cut. Prior to the employment report, we believed that Powell made a strong argument for a 50bp cut on the totality of the data at the time of Jackson Hole. We didn’t see his assertion that the Fed will do everything it can to support a strong labor market as consistent with leading with 25bp given the currently very restrictive policy stance. Perhaps this was not his intention at the time, but we argued that data from the Conference Board, regional Fed surveys, the Beige Book, and JOLTs all indicated that the labor market had deteriorated since Jackson Hole and had already suffered the “unwelcome further weakening” that Powell sought to avoid. We didn’t believe the employment report should have such a prominent role in the decision to cut 50bp as it was only one part of the totality of data that Powell claims is important. And we said that only a very strong report could derail a 50bp cut. The report was not strong, but again Waller seemed to think it was strong enough, thus apparently undermining our position.

We Need To Be Nimble

While we couldn’t ignore the pre-blackout messaging, we were hesitant to underweight the odds of a 50bp cut next week. Despite complacency about the labor market from Fed officials, the data supported a 50bp cut, and we remain convinced that Chair Powell’s Jackson Hole speech signaled that he wanted a 50bp cut. Indeed, Powell drew a line in the sand by declaring the Fed did not “seek or welcome” further labor market deterioration, but the data since Jackson Hole tells us the labor market has already crossed that line.

The messaging from New York Fed President John Williams and Governor Chris Waller, however, clearly signaled an intention to slow walk rates cuts. The gap between Powell and other FOMC participants was inexplicable in our view, but Waller in particular has never hard guided the markets in the wrong direction ahead of an FOMC meeting.

We perhaps should have taken that sense of hesitancy a little more to heart, because the Fed will most likely lead the cutting cycle with a 50bp cut at next week’s FOMC meeting.

Bottom Line: We get more jobs data tomorrow, but so far this week, the data flow indicates the labor market has already and will continue to experience the further weakening that we have been expecting and that Powell said was “unwelcome.” The totality of the data suggests that this will be the case even if the August employment report firms relative to July. Future reports are likely to be weaker. In theory, that should reduce the importance of this week’s employment report. The totality of the data suggests that we should look through strength, but Fed presidents have placed a heavy weight on the outcome of this next read on the labor market. We think that Powell is leading his colleagues toward a 50bp rate cut in September as insurance against adverse outcomes and that his position is resilient to the outcomes of the labor report, but it is not yet clear the consensus will join.

We would describe these dynamics as keeping an open mind to the October meeting, but far from a base case, and more as insurance against unlikely and exogenous risks that could materialize over the coming month, or a failure of growth to pick up as expected.