Markets
Let’s start with the numbers. In its updated quarterly Summary of Economic Projections, the US central bank raised its growth path over the 2025-2027 policy horizon from 1.4%-1.6%-1.8% to 1.6%-1.8%-1.9%. Expectations around the unemployment rate shifted from 4.5%-4.5%-4.4% to 4.5%-4.4%-4.3%. Finally, both headline and core PCE deflators are now projected at 2.6% next year instead of 2.4%. Summarizing: stronger growth, lower unemployment and higher inflation. Without additional context, this calls for raising the Fed funds rate instead of lowering it. Yet the latter was the (as expected) outcome at yesterday’s FOMC meeting. The Fed lowered its policy rate by 25 bps to 4%-4.25% after keeping it stable at 4.25%-4.50% since the start of the year. Fed Chair Powell labelled the rate cut as a “risk management decision”. Compared with the July policy statement and in line with the pivot made by Powell at the Jackson Hole conference, the Fed now judges that downside risks to employment have risen. In light of that shift in balance from “attentive to the risks to both sides of its dual mandate”, the committee almost unanimously decided to lower the Fed funds rate. It’s a strong signal from within the Fed that governors back Powell and push back against any political attempts to manipulate the independent central bank. Only President Trump’s recently installed Fed governor Miran voted in favour of a 50 bps rate cut. The median estimate for the end-of-year Fed Funds rate now stands at 3.5%-3.75% from 3.75%-4% in June. Powell stressed that this median hides a split between 9 governors in favour of back-to-back action in October and December and 1 (Miran) even suggesting an additional 125 bps split over those two meetings and 9 governors preferring either a status quo from here on (6), only one rate cut (2) or even a rate hike (1). It’s also telling that the press release didn’t hint at a continuation of gradual rate cuts if things play out as expected, suggesting that data dependency and a meeting-by-meeting approach is more than ever name of the game. Given the new risk assessment, we think that disappointing labour market data carry a bigger weight than upward inflation surprises. We don’t draw any conclusions from median policy rate estimates for 2026 (3.25%-3.5%), 2027 (3%-3.25%) and 2028 (3%-3.25%) other than there is no willingness to get rates below a neutral 3% (only 5 out of 19 governors in 2026, 6 in 2027 and 8 in 2028). Markets initially reacted in dovish fashion after the median 2025 estimate confirmed a scenario of two more 25 bps rate cuts this year. EUR/USD set a new YTD top at 1.1919, but returned back to the 1.18 area after US Treasuries changes tack. US yield eventually added 4.2 bps (30-yr) to 6.9 bps (5-yr) with the 2-y and 10-y yields bouncing off technical support at respectively 3.5% and 4%. The main conclusion after yesterday is that we’re likely up for a very volatile year-end.
News & Views
After pausing since April, the Bank of Canada (BoC) cut its policy rate by 25 bps to 2.5% yesterday. The BoC sees further weakness in the economy after growth contracted by about 1% in Q2 as exports and investment heavily weighed on growth. Employment recently declined mainly due to job losses in trade-sensitive sectors, but job growth also slowed in the rest of the economy. The BoC expects slow population growth and weakness in the labour market to weigh on household consumption in the months ahead. CPI inflation was 1.9% in August and measures of core inflation were near 3%, but the BoC assess underlying inflation to be closer to 2.5%. The combination of weaker growth and less upside inflation risks justified yesterday’s rate cut. The MPC concludes that it will carefully proceed, with particular attention to risks and uncertainties, without giving concrete guidance on the next policy step. Markets still discount a final cycle cut by early next year.
The Brazilian central bank kept its policy rate unchanged at 15% and stuck with a rather hawkish bias by saying that in the current context of heightened uncertainty, the committee “will remain vigilant”. They will not hesitate to resume the hiking cycle if appropriate. The economy shows some moderation in growth, but the labor market is still strong. Headline inflation and measures of underlying inflation remain above the 3% inflation target and the central bank expects inflation at 3.4% in Q1 2027. Also inflation expectations remain too high, requiring a significantly contractionary monetary policy for a prolonged period. The Brazilian real yesterday finished the session near the strongest level against the dollar since June last year.
 to 6.9 bps (5-yr) with the 2-y and 10-y yields bouncing off technical support at respectively 3.5% and 4%. The main conclusion after yesterday is that we’re likely up for a very volatile year-end.){kind=link}