Markets
UK eco data this week won’t alter the outcome of tomorrow’s Bank of England meeting. Labour market (yesterday) and inflation numbers (this morning) printed bang in line with consensus. The unemployment rate stabilized in the 3 months to July at 4.7% with job growth rising by 232k. Preliminary August payrolls (different statistical series) dropped by 8k. The labour market isn’t the central bank’s biggest worry though. Sticky inflation is. UK price growth accelerated to 0.3% M/M with the annual number stabilizing at a 3.8% Y/Y 18-month high, in line with the path set out by the BoE in August. The UK central bank expects price growth to peak at 4% Y/Y in September and to hold in the high 3.5%-4% range until year-end. Core inflation slowed from 3.8% Y/Y to 3.6% Y/Y with services inflation at 4.7% Y/Y from 5% Y/Y mainly because of lower, volatile, airfare prices. The central bank’s core services gauge probably ticked up from 4.9% Y/Y to 5% Y/Y and food inflation – important for shaping households’ inflation expectations – accelerated to 5.1% Y/Y. Economic developments suggest that the BoE will signal an end to its quarterly rate cutting pace in place since August of last year. UK money market fully discount a next rate cut by August of next year! Apart from a hawkish pause, attention will go to quantitative tightening plans for the October 2025-September 2026 period. Over the three past years, they ran down the asset purchase portfolio by £100bn each year (current holdings around £575bn) with active sales adding to the natural run-off. The median guesstimate for the next 12 months is a slowdown from £100bn to £72bn. With £49bn of gilts maturing, this would imply an increase in active sales from £13bn over the past 12 months. A shortening of the maturity of these sales is likely in order to avoid putting unwanted additional pressure on the vulnerable very long end of the UK yield curve.
The US central bank is expected to deliver a 25 bps rate cut tonight to 4%-4.25%, though the decision could face dissenting views in both directions. The bigger question is whether Powell and/or the updated quarterly Summary of Economic Projections signal the start of cutting cycle (2 more 25 bps rate cuts this year). Powell will have to walk a tight rope to keep market expectations in check. Median estimates for 2026 and 2027 will probably be closer to a neutral 3% than in June (3.5%-3.75 & 3.25%-3.5%) but the difference in opinion will be large. It’s back to navigating the stars under cloudy skies. We have the impression that US markets are willing to pick up any dovish signals tonight, adding to or accelerating 2026 rate cut bets. If the tone of Powell’s presser is in line with his Jackson Hole speech, they’ll see it as an all clear with US Treasuries ready to really in bull steepening fashion and the dollar vulnerable to the loss of interest rate support. Watch technical support in the US 2-yr (3.5%) and 10-yr (4%) yield.
News & Views
Bank Indonesia unexpectedly slashed the policy rate by 25 bps today to 4.75%. It brings cumulative easing over the past 12 months to 150 bps. The central bank will keep watching growth, inflation & the currency to check the room for further cuts but there’s little doubt that there is more to come. BI is in “all-out pro-growth” mode, governor Perry Warjiyo said. BI said today’s move aligns with the government’s efforts to boost the economy. President Prabowo is seeking to spur growth following protests over the cost of living with housing and village cooperative programs. The Finance Ministry and BI recently entered into a renewed “burden sharing” agreement in which the central bank helps to fund the project. That’s causing concern over central bank independence amid blurring lines between monetary authorities and the government. Recent reports of lawmakers considering rule changes to the central bank that include a lower bar for removing senior officials obviously aren’t helping. The Indonesian rupiah ended the day stronger at USD/INR 87.80. Last week’s record INR lows at 88.45 remain at very close range though.
Czechia’s central bank Deputy Governor Jan Frait said monetary policymakers shouldn’t stimulate the economy any further with more rate cuts, barring major economic shocks. Frait is particularly worried about core inflation (2.8% in August), which remained at a “less favorable level” compared to the headline outcome. The latter is driven by a decline in energy prices that “won’t last forever” while wages and services inflation keep on rising fast. Monetary policy according to Frait is no longer having a restrictive impact with the current 3.5% level of the policy rate hanging in the balance with the stronger exchange rate. The Czech koruna has appreciated in recent months to EUR/CZK 24.34. To Frait this is in line with fundamentals such as economic activity, balance of payments and favorable risk perceptions from investors.
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