Friday The 13th: The Cutting Cycle

By Philip Marey, Senior US strategist at Rabobank

Friday The 13th: The Cutting Cycle

Market speculation about a 50 bps rate cut by the Fed next week returned overnight after the Financial Times and the Wall Street Journal called the Fed’s rate choice between 25 and 50 bps a close call and former FOMC member Bill Dudley said there was a strong case for 50.

The rate slashers are back from hibernation. Inflation has kept them away for a few years, but now that central banks have their inflation targets in sight they are back to cutting. Yesterday, they struck in Europe. Next week, they’ll initiate the cutting cycle in the US.

As expected, the ECB cut the deposit facility rate by 25 basis points to 3.50% yesterday. As our ECB watcher Bas van Geffen noted in his ECB post-meeting comment, 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. Inflation progress warranted yesterday’s rate cut, but the outlook remains highly uncertain. The staff projections are broadly unchanged from the June forecast. This does not warrant a change in pace. We continue to believe that the ECB will skip October, to cut again in December. Further out, the staff projections suggest a slightly lower terminal rate may be achieved in 2025. However, we maintain that the ECB overlooks geopolitical and trade risks next year.

The US PPI figures for August were slightly higher than expected, but at the same time there were downward revisions for July. The categories of the PPI that are used in the calculation of the PCE deflator were mild. The US initial and continuing jobless claims came in largely as expected and have been moving sideways at the turn of the month. In fact, the claims data suggest that the labor market is somewhat stronger than at the end of July.