Developed Market Central Bank Watch - October 2024

Economic

Summary:

Central Bank Tracker: The DM rate-cutting cycle picked up significant steam in September thanks to the first U.S. interest rate cut.

Insights for What’s Ahead

The Developed Market (DM) monetary policy shift gathered steam in September. Last month, the Bank of Canada, the European Central Bank (ECB), the Swiss National Bank, and Sweden’s Riksbank all lowered monetary policy rates, the first time five banks cut interest rates in the same month. Additionally, the Federal Reserve Board (Fed) cut interest rates to reduce the degree of restrictiveness in monetary policy. It took the total number of interest rate cuts by the major 12 DM central banks The Conference Board follows regularly to thirteen.

The FOMC increased the number of rate-cutting central banks to seven. The Federal Reserve increased the ranks of rate-cutters to seven. The Fed was also the first central bank to cut interest rates by more than 25 basis points during the current DM cutting cylces. Outside the three Asian banks, Australia’s Royal Bank of Australia (RBA) and Norway’s Norgesbank are now the only DM central banks that are not among the rate cutters.

The DM monetary policy rate average moved down more convincingly last month. The (GDP-weighted) DM central bank monetary policy rate average declined by 28 basis points in September, the biggest one-month drop since March 2020. The cumulative decline stood at 38 basis points at the end of September.

The Fed finally joined the group of rate-cutters with a half-point cut, the biggest by any major central bank so far

The FOMC cut monetary policy rates by 50 basis points to 5.00%. It was the long-awaited start to the U.S. rate-cutting cycle. With that decision, the Fed offered something for everyone: a sizable interest rate cut for doomsayers and an upbeat assessment of the U.S. economy for those who are more optimistic. Headline CPI inflation has fallen to 2.5%, and the Fed’s preferred inflation gauge, the PCE deflator, is down to 2.3%. U.S. real interest rates (using headline CPI) are still above 2%, even after the 50-basis-point cut. The Fed’s Summary of Economic Projections, which is an accumulation of 19 separate estimates by FOMC participants, suggests two more quarter-point interest rate cuts this year, four more in 2025, and the neutral monetary policy rate to be reached in 2026. The Conference Board anticipates 25bp cuts at each the November and December meetings and 125bp of cuts in 2025, leaving the fed funds rate target range at 3.00-3.25 percent by end-2025.

The ECB cut monetary policy rates by 25 basis points to 3.50% in September, the bank’s second interest rate cut in the last three meetings. Euro Area inflation has slowed to 2.2%, and economic conditions are deteriorating again. The preliminary August composite PMI index fell to 50.5, close to the 50 expansion/contraction threshold. Real interest rates at 1.3% are still well above the ECB’s most recent (January 2024 ECB Economic Bulletin) update of the Euro Area neutral rate. Yet, the ECB’s policy statement continued to emphasize that “domestic inflation remains high” and that to bring inflation back to target monetary policy rates will need to remain “sufficiently restrictive for as long as necessary to achieve this aim.”

The Bank of Japan (BOJ) left monetary policy rates unchanged at 0.25%. The bank raised interest rates twice this year, in March and July. Both times, the decision was followed by a jump in market volatility that prompted the bank to pause between interest rate hikes. Japanese real monetary policy rates at -2.8% remain far below the 1.4% (GDP-weighted) DM average. The bank’s monetary policy statement had a slightly more cautious tone. It stated, "Japan's economy has recovered moderately, although some weakness has been seen in part.” In July, the underlying inflation forecast still showed the rate below the bank’s 2% target in 2024 and 2025, rising marginally above it only in 2026.

The Bank of England (BOE) left monetary policy rates unchanged at 5%. The Monetary Policy Committee’s decision was almost unanimous; only one member voted for another interest rate cut. Headline inflation hit the bank’s 2% target during May but has started to re-accelerate. UK real monetary policy rates at 2.7% are still the highest across the major DM central banks, but only slightly higher than the Fed’s real rate. The monetary policy statement highlighted that the bank remains in a cautious rate-cutting mode, stating that “a gradual approach to removing policy restraint remains appropriate.” UK monetary policy rates are on a downward trajectory, but the pace is slower than most of its rate-cutting peers.

The Swiss National Bank (SNB) cut monetary policy rates by 25 basis points to 1.00%. It was the bank’s third cut since the start of the rate-cutting cycle in March. Swiss real interest rates are back below 0% and not far from the -0.7% neutral real rate proxy. Inflation has fallen to 1.1%, prompting the bank to maintain a rate-cutting bias in its monetary policy statement: “Further cuts in the SNB monetary policy rate may become necessary in the coming quarters to ensure price stability over the medium term.” The SNB remains concerned about further disinflationary pressure from the recent appreciation of the Swiss franc.

Sweden’s Riksbank cut monetary policy rates by 25 basis points to 3.25%. It was the bank’s third cut since starting the rate-cutting cycle in May. Inflation has fallen to 1.2%, keeping Swedish real monetary policy rates at 2%. Low inflation is keeping the bank in rate-cutting mode. The statement hinted at more interest rate cuts: “If the outlook for inflation and economic activity remains unchanged, the policy rate may also be cut at the two remaining monetary policy meetings this year.” It also hinted at a possible acceleration in the pace of cuts: “A cut of 0.5 percentage points is possible at one of these meetings.”

Norway’s Norgesbank left monetary policy rates unchanged at 4.50%. The bank has not joined the group of rate cutters. Norwegian inflation at 2.6% remains above the bank’s 2% target, and real interest rates at 1.9% remain well above neutral. The monetary policy statement shut the door on interest rate cuts this year: “the policy rate will likely be kept at 4.5 percent to the end of the year.” The Norgesbank remains concerned about rising business costs and the impact of this year’s currency depreciation. Wage growth is still above 6%, and the Norwegian Krone has been the weakest major DM currency (measured against the US dollar) this year. Monetary policy rate cuts will have to wait until 2025.

The Bank of Canada (BOC) cut monetary policy rates by 25 basis points to 4.25%, the bank’s third since starting the rate-cutting cycle in June. Canadian inflation has fallen to the bank’s 2% target, and real interest rates at 2.3% are still among the highest across the major DM central banks. The monetary policy statement did not include any forward guidance. Yet, it acknowledged that inflation pressures are easing and continued to describe the economy as being in a “state of excess supply.” That suggests the bank will continue to remove policy restrictions and bring interest rates closer to neutral.

The Reserve Bank of Australia (RBA) left monetary policy rates unchanged at 4.35%. Australia has not joined the group of rate cutters. Headline inflation at 2.6% is close to the bank’s 2.5% target. Yet, the RBA focuses on underlying inflation, which is still at 3.9%. The monetary policy statement maintained that the bank’s “current forecasts do not see inflation returning sustainably to target until 2026.” It seems unlikely the RBA will be cutting interest rates soon.

To stay updated on all economic events of today, please check out our Economic calendar

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ING

Forex

USD: Looking outside of the US

The start of the week has been quite mixed in FX, with the low-yielding JPY and CHF rising and the high-beta AUD and NZD under additional pressure. The Chinese markets have reopened after a long holiday with another strong session as recent expansionary measures by Beijing continue to help sentiment in the region. That can weigh moderately on USD today, even though our view for the rest of the month remains generally constructive on the dollar, as discussed yesterday.

We have observed some quite limited spillover into FX from US 10-year yields hitting the 4% mark, which appears as the tail of the payroll-induced move that has already triggered some sizeable positioning readjustments in dollar crosses. There is a possibility that the FX market will take a break from being driven by rates now that the new, shallower 25bp per-meeting rate path by the Fed has become the market baseline. We suspect inflation data this week won’t prompt big directional changes in the dollar, which may instead respond more to the Middle East turmoil, and consequent moves in oil prices.

Still, we’ll be on the lookout for surprise reads in the NFIB Small Business surveys today, where the hiring plan sub-index has had a decent correlation with private payrolls. Our call remains a stabilisation in DXY around 102-103 with upside risks, even if we see a slightly lower dollar today.

EUR: Watch for a Schnabel clarification

Markets are virtually fully pricing in an ECB rate cut next week (23bp), but our economics team discusses here how the decision may well be much closer than the rates market suggests. That’s because the ECB already incorporated weaker growth and inflation below 2% in its latest projections, and while Isabel Schnabel’s latest speech focused on growth downside risks, she also remarked how monetary policy could do little to ease those risks. Incidentally, single-country data keeps pointing to sticky services inflation, and the recent oil price rise means a potential revision higher in the inflation forecasts at the next round of staff projections.

Markets are hardly ignorant of these factors, but are equally hanging on to dovish comments by ECB members like Villeroy and probably also the view that they can push the ECB into a cut by pricing it in fully on meeting’s day. There is an ECB meeting chaired by Isabel Schnabel today, and we’ll be interested to see whether she wishes to clarify her stance. A hawkish re-tuning on her side can send EUR/USD back above 1.10, but we are not sure markets will be giving up on an October cut very easily and the wide USD:EUR rate gap still points to some pressure on EUR/USD in the near term.

RBNZ: A pre-emptive 50bp cut

The Reserve Bank of New Zealand (RBNZ) announces monetary policy overnight (0200 BST), and both markets and consensus are leaning in favour of a 50bp rate cut. As discussed in our meeting preview, we agree.

The RBNZ has to operate with quite limited information on inflation and the jobs market, on which official data is only released quarterly. The only hard data input since the surprise August 25bp cut has been the second-quarter GDP report, which showed negative growth (albeit slightly better than consensus). That may well be enough to add pressure on the RBNZ to take rates to neutral at a faster pace, especially after the 50bp cut by the Fed in September.

A half-point cut before seeing third-quarter inflation figures obviously requires substantial confidence in the disinflation process. We see high risks of headline CPI having moved below 2.0% in the third quarter, which would make the real rate uncomfortably high if the RBNZ doesn’t keep cutting.

Markets are pricing in 45bp for this meeting, and 91bp in total by year end. We think a 50bp will add more pressure on the underperforming NZD, which may be trading closer to 0.61 than 0.62 once we get to the US election risk event.

CEE: Can the Czech central bank pause in December?

Yesterday's data across the region was rather stronger than expected but still does not offer much optimism on the CEE economy. Today's calendar in the region does not have much to offer except retail sales data in the Czech Republic. CEE FX is again slightly under pressure coming from Friday's EUR/USD move lower in our view and lingering geopolitical risk aversion. However, we believe inflation numbers in the second half of the week could return markets to the local story.

Perhaps the most interesting will be inflation in the Czech Republic, where our economist in Prague, David Havrlant, expects inflation to rise from 2.2% to 2.4% year-on-year, in line with market expectations. However, the risks are to the upside due to uncertain energy, food and housing prices. The problem is that there is a strong base effect in the coming months and the September number will significantly define the rest of the year and the Czech National Bank (CNB) rate path. David's baseline assumes a pause in the cutting cycle in December and February mainly because of the risky inflation numbers in December and January and the lag in releases.

Although my view is mixed on this one, looking at just normal seasonal movements and base effects, 3% inflation becomes a realistic forecast and a risk zone for the CNB, which after 275bp of cuts delivered may indeed consider a pause despite weak economic data. Although the market has priced out a lot of the CNB easing over the past two weeks, the terminal rate priced in is around 3.00-3.25%. This is close to our forecast but I still think a pause in the cutting cycle would be a negative surprise for the rates market but positive for the CZK despite the weak economic data. The koruna has so far proven to be the most resilient currency in the current sell-off in the CEE and EM space and I believe EUR/CZK will return to 25.00 once global markets calm down. Moreover, should the CNB confirm this hawkish approach, the CZK could see significant support.

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Justin

Economic

Japan saw the highest number of bankruptcies since 2013 in the six months through September, as companies were increasingly hit by rising costs.

Some 4,990 firms went bankrupt in that period, increasing 18.6% from the previous year, according to a report by Teikoku Databank on Tuesday. The number of firms going under in Japan has continued to increase since the second half of the year ending March 2022.

The jump in bankruptcies partly reflects the impact of higher prices, particularly for small companies. A record 472 out of the 4,990 firms cited inflation as the main reason they went bankrupt, the report showed. The country’s key price gauge has stayed at or above the Bank of Japan’s 2% target for over two years, as the weak yen has inflated import costs for everything from food to energy.

Construction, manufacturing and retail were among the sectors that had the highest number of cost-driven bankruptcies, according to the report.

Beyond rising prices, a record 163 firms cited labour shortages as a reason for their struggles. Japan’s unemployment rate has remained below 3% for over three years, the lowest level among developed economies.

The tighter labour market puts pressure on companies to boost salaries to retain their employees, further straining their budgets. While some Japanese companies successfully offered more than a 5% wage increase for their workers in pay negotiations earlier this year, many small and medium-sized firms have reported difficulties in following suit.

Looking ahead, another potential risk for companies is higher debt-servicing costs following the BOJ’s interest rate hikes in March and July. Some major and regional banks have already announced they will raise the lending rates on certain short-term loans.

Source: The edge markets

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Cohen

Economic

While the delay in the EUDR implementation would give palm oil producer countries time to take the necessary steps to comply with the regulations, the regulator should ensure palm oil-producing countries are not unfairly labelled as "high risk" under its country benchmarking, said Johari.

“In the spirit of trade fairness, we hope that the European Parliament will play a more accommodative role to address this matter for the benefit of the world,” he said.

It is understood country benchmarking under the EUDR is a risk assessment framework that categorises countries into three groups — low-risk, standard-risk and high-risk — based on their deforestation and forest degradation levels, alongside governance factors such as law enforcement and adherence to international standards.

At a press conference on Tuesday, Johari reaffirmed that Malaysia is ready to comply with the EUDR, noting that 73% of the country’s palm oil industry is managed by large companies and estates, which are well positioned to meet the regulations.

Additionally, Johari said that the Malaysian Sustainable Palm Oil (MSPO) certification is set to gain global recognition, as it addresses key issues such as traceability, deforestation-free policies, the requirement for legitimate land ownership titles, and compliance with international labour practices.

He highlighted that 4.6 million hectares, equivalent to 81.24% of the country’s palm oil plantations, were MSPO-certified as of August.

Regarding the smallholders who have not yet complied with MSPO standards, the minister said that the government will continue to support them by promoting the use of quality planting materials, encouraging good agricultural practices, and providing financial assistance for replanting.

“We just need a little bit of time for our smallholders, and the government will assist them to comply over the period of time,” Johari told reporters after officiating the Malaysian Palm Oil Forum, an event organised by the Malaysian Palm Oil Council.

Last week, the European Commission announced its plans to delay the implementation of the EUDR by another 12 months, pushing it to Dec 30, 2025.

This decision followed criticisms from Malaysia, along with 16 other nations from Asia, Latin America, and Africa, which have expressed concerns about the regulations. Notably, both German Chancellor Olaf Scholz and the Biden administration supported calls for the delay.

In Europe, 20 of the EU’s 27 agriculture ministers backed the postponement, as did key figures such as European Parliament lawmaker Peter Liese and non-governmental organisation Fairtrade, which voiced concerns about the regulations' impact on producer organisations.

The EUDR, which regulates commodities linked to deforestation, covers items like palm oil, cocoa, coffee, soy, timber, and rubber. It requires complex geolocation data, polygon mapping, and due diligence statements from exporters.

Industry estimates suggest compliance could cost the palm oil sector US$650 million (RM2.74 billion) annually, with US$260 million of that burden falling directly on smallholders.

Source: The edge markets

To stay updated on all economic events of today, please check out our Economic calendar

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ADP

Economic

There were a few data signals going into last Friday’s blockbuster jobs report that many market watchers and economists missed.

Layoffs, as measured by a rolling four-week average of initial jobless claims, hit their lowest level in more than a year and a half. August showed an uptick in job openings, a hint that companies were about to ramp up hiring. And September’s ADP National Employment Report suggested that a rebound in private-sector hiring was under way.

Even people who read these data signals, however, might have been unprepared for the big jump in hiring we saw in Friday’s non-farm payrolls report from the Bureau of Labor Statistics. Job creation was up 60 percent, to 254,000 new jobs in September from 159,000 in August.

Even after applying upward revisions to August and July, average job gains for the three months preceding September were only 140,000.

What happened? Why were employers slow to hire this summer but so willing to hire in September?

The answer is uncertainty.

Uncertainty versus risk

Economists make a sharp distinction between risk and uncertainty. For employers, both can describe an unknown.

Companies can gauge risk by assigning a probability that the situation in question occurs. Then they can prepare for that outcome.

Uncertainty, by contrast, can’t be measured, and companies therefore can’t prepare for it. Uncertainty can lead employers to delay hiring and investment decisions.

Uncertainty is heightened

In May 2023, the World Health Organization declared an end to the public health emergency caused by the global pandemic, effectively ending one of the most uncertain episodes in economic history. More than a year later, however, we’re still living with higher-than-normal uncertainty.

The United States is nearing the end of a four-year presidential election cycle, which tends to create economic inertia as some companies and consumers put off making big financial decisions while they wait to see if big policy changes are in the making.

Monetary policy and inflation create their own uncertainty. In September, the Federal Reserve cut interest rates from their highest level in two decades. Before that decision, economic commentators were in wild disagreement about the health of the economy as they debated the likelihood of a soft or hard economic landing and argued over the Fed’s ability to navigate too-high inflation while avoiding an economic slowdown.

Global tensions in the Middle East are another source of uncertainty, with the added potential side effect of oil price volatility on another bout of inflation.

Last week’s short-lived port strike could have restarted another inflation surge had it continued. The labor action reminded us how supply chain logjams can arise suddenly.

Finally, Hurricane Helene is proving to be one of the most destructive U.S. storms on record, as measured both the number of lives lost and the cost to the economy.

Taken together, these events show how vulnerable the economy is to an increased level of uncertainty, be it geopolitical, social, monetary, political, or weather-related.

The effect on hiring

This summer, we saw the impact of uncertainty on hiring, particularly for companies with more than 500 workers. ADP payroll data showed that monthly hiring by large employers averaged a moderate 53,000 from June to August. In September, hiring by these large companies jumped to 86,000.

Part of that increase may be attributable to the long-awaited start of Fed rate cuts. There also was clearer evidence than we’ve seen in months, maybe years, that the Fed had engineered a soft landing that will put us on a path to low inflation with little or no economic pain.

My take

Seventy-five percent of the jobs created last month were in sectors that are less sensitive to interest rate policy, including government, leisure and hospitality, and education and healthcare.

Cyclical sectors, where rates make a big difference, either continued to shed jobs (manufacturing) or held steady (construction).

That means last month’s hiring surge wasn’t directly attributable to lower interest rates or changing economic conditions. Instead, it was triggered by a reduction in the uncertainty that has been clouding employer decisions. Hesitancy to hire over the summer wasn’t driven by economic weaknesses or lack of demand for workers.

There’s a lesson here for the Federal Reserve: Clarity is the antidote to uncertainty. It’s okay to be data-dependent, but if investors, companies, and consumers are kept guessing on monetary policy, that uncertainty could lead to unwarranted economic stasis that looks like economic weakness even if it isn’t.

To stay updated on all economic events of today, please check out our Economic calendar

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S&P Global Inc.

Economic

The worldwide PMI surveys showed average prices charged for goods and services rising globally at an increased rate in September. However, the pace remained among the weakest seen over the past four years to suggest that global consumer price inflation remains subdued by recent standards. Regional variances were noteworthy, however. While central bank targets have come into view via the PMI data in the US as well as the UK and eurozone, the former saw an uptick in price growth to serve as a reminder that risks persist in achieving sustainably low inflation.

Global PMI selling price inflation holds close to four-year low

The latest global PM average prices charged index, at 52.5, was above 52.3 recorded in August. However, August's reading had been the lowest since October 2020, and September's reading was the second-lowest seen over this near-four-year period.

Global inflation was meanwhile estimated at 4.0% in August according to S&P Global Market Intelligence calculations from the latest available national sources, its lowest since September 2021 and following the cooling trend that had been signalled in advance by the PMI. The PMI data - which tend to lead official inflation data by around six months - hint at the rate of increase will moderate closer to 3% in the coming months.

Increased service sector inflation - which has been the main cause of elevated inflation since late-2022 - was the cause of the higher rate of overall selling price inflation in September, though the rise needs to be considered in the context of August's reading having been the lowest since December 2020. Thus, while the rate of services inflation remains above its per-pandemic decade average, it is subdued by recent standards.

Manufacturing selling price inflation meanwhile ticked lower and has now fallen back in line with the pre-pandemic average.

US inflation shifts higher but remains subdued

Among the major economies, the US notably reported an increased rate of selling price inflation to the highest since March, driven by increased rates for both goods and services. However, historical comparisons with official rates of inflation, such as core PCE prices, suggest that even the current higher level of the PMI Prices Charged Index is consistent with US inflation remaining close to the FOMC's 2% target, both when compared to annual rates of change and annualised monthly changes in core PCE inflation.

As such, the PMI data support the Fed's shift in focus away from inflation to supporting the labour market, though none the less serves as a reminder that inflation still needs to be watched for a potential uptick.

UK PMI inflation signal closes in on 2%

In the UK, selling price inflation dropped in September to its lowest since February 2021. The further decline brings the PMI prices charged index closer - though still slightly above - the Bank of England's 2% target when compared with official core inflation. Although manufacturing price inflation nudged higher, often linked to supply shortages, services inflation - which has been the main area of elevated inflation in recent months - cooled to a 43-month low in an encouraging sign for the door to be opened for further Bank of England interest rate cuts.

Eurozone prices

The PMI selling price data meanwhile showed falling inflationary pressures in the eurozone, the index covering charges levied for goods and services dropping to its lowest since February 2021 and down to a level consistent with consumer price inflation falling below the ECB's target. Prices charged for goods fell at the fastest rate for four months and prices levied for services rose at the slowest rate since April 2021.

Prices fall in mainland China

Elsewhere, the PMI data showed inflationary pressures persisting to a modest but - by historical standards - relatively elevated rate in Japan, while prices fell in mainland China. The latter reflected falls in prices charged for both goods and services, the former dropping at the sharpest rate for six months.

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Economic

Japan's inflation-adjusted wages fell in August while household spending also declined, but analysts say underlying trends point to a gradual recovery in pay and consumption and should support the central bank's plans for additional rate hikes.

Real wages in the world's fourth-largest economy fell 0.6% in August from the same month a year earlier, according to date released by the Ministry of Health, Labour and Welfare on Tuesday. That came after a revised 0.3% rise in July.

Real wages had turned up in June for the first time in more than two years as companies bumped up summertime bonuses, though the labour ministry had said the contribution of such special payments to the data would wane from August.

Those payments rose 2.7% in August versus a revised 6.6% in July and 7.8% in June.

At the same time, the August wage data showed base salary marked the biggest rise in nearly 32 years at 3.0%, reflecting this spring's labour-management pay negotiations that led firms to deliver the biggest hike in three decades.

"The real wages falling back to a negative territory was expected," said Masato Koike, senior economist at Sompo Institute Plus. "In terms of the data itself, it's not that bad."

Separate data showed household spending declining 1.9% from the year-earlier in August, potentially raising doubts about the strength of private consumption, which accounts for more than half of Japan's economy.

The fall, however, was smaller than the market estimate for a 2.6% drop based on a Reuters poll, and on a seasonally adjusted basis, spending rose 2.0% from the previous month, marking the fastest pace of increase in a year.

"Although the household savings rate remains high, consumption will probably recover gradually if the perception of wage increases improves consumer sentiment," said Yutaro Suzuki, economist at Daiwa Securities.

Sustained wage growth is a prerequisite for the Bank of Japan to raise interest rates again after its first hike in 17 years in March and a follow-up increase in July.

While the central bank said in its quarterly report on Monday that a rise in prices and wages was spreading across Japan, it also noted the concern of small and medium-sized enterprises regarding attendant pressure on profit.

Nominal wages, or the average total cash earnings per worker per month, grew 3.0% to 296,588 yen ($1,999.11) versus August last year, compared with an on-year 3.4% rise in July. Overtime pay, a barometer of corporate strength, grew 2.6%.

The consumer price index officials used to calculate real wages, which includes fresh food prices but excludes owners' equivalent rent, climbed 3.5% in August, the highest rise since October last year.

Japan's economy expanded by an annualised 2.9% rate on solid consumption and core inflation remains above the central bank's 2% target, keeping alive expectations for further rate hikes.

($1 = 148.3600 yen)