LONDON (Reuters) – Don’t go anywhere: an eventful week is approaching, with central banks from the United States to Brazil, Europe to Japan meeting.
The U.S. Federal Reserve is expected to cut interest rates for the first time in four years, Brazil may raise them for the first time since 2022, and Japan will keep an eye on volatile markets as it considers when to raise rates again.
But this isn’t just a central bank issue, with UniCredit’s move for Commerzbank (ETR:) reigniting M&A talks between European banks.
Louis Krauskopf in New York, Ray Wee in Singapore, Marcela Ayers in Brasilia, Naomi Robnick, Karin Stroecker and Tommy Wilkes in London provide their global market outlook for the week.
1. The time has finally come
The Fed is expected to cut interest rates for the first time this fiscal year when it finishes its two-day meeting on Wednesday. The key questions now are how big and how fast it will ease.
Recent discussion has centered on whether the Fed will opt for a 25 basis points (bps) or 50 bps rate cut in September, with a smaller cut becoming more likely after data showed the Consumer Price Index rose slightly in August while core inflation was somewhat shaky.
Fed Chairman Jerome Powell’s news conference will be scrutinized for hints about the possible pace of rate cuts, after August’s weaker-than-expected jobs report was the second straight month, raising concerns that the Fed may be easing monetary policy too slowly.
Traders are still pricing in a Fed rate cut of more than 100 basis points by the end of the year, which could lead to a divergence between the market and the Fed’s dot plot forecasts.
2/ Up, not down
Brazil’s central bank also is expected to begin a tightening cycle on Wednesday, diverging from the Fed’s approach, with inflation at 4.25% above target and stronger-than-expected economic growth in Latin America’s largest economy.
After leaving rates unchanged at 10.50% in July, the central bank has signaled it may raise borrowing costs to meet its 3% inflation target. A more hawkish stance by new Governor Gabriel Galipolo has strengthened expectations that a 25 basis point hike that could send the real stronger is imminent.
But Brazil is an outlier among emerging economies.
In South Africa, where inflation is close to target, policymakers are expected to cut interest rates for the first time in four years on Thursday. Turkey is expected to keep rates on hold at 50 percent on the same day but could cut them in November.
Indonesia’s central bank indicated it may cut interest rates in the fourth quarter at a meeting on Wednesday.
3/ Another Unusual The only way forward for Japanese interest rates is up. At least, that’s what Bank of Japan policymakers are suggesting, but it would be a big surprise if they were to raise rates this month. The BOJ is not planning to change rates at its policy meeting that ends on Friday, as it is focused on tightening its monetary policy going forward after raising them twice already this year. Bucking the trend of global monetary easing, BOJ policymakers have signaled their determination to raise interest rates further as long as markets remain stable and economic conditions remain favorable. This has supported the yen, which has risen more than 10% since its 38-year low in July, but investors remain concerned that further unwinding of yen-funded carry trades could spark new volatility.
4. Unpredictable
The Bank of England and Norges Bank are expected to keep interest rates on hold when they meet on Thursday. The Bank of England is expected to ease monetary policy two more times before the end of the year, and Norway could also begin easing before then.
It’s difficult for anyone, perhaps even the world’s top central bank governors, to place much faith in these projections: Any surprises from the Fed could upend the outlook for global monetary policy.
An unexpectedly dovish Fed could weaken the dollar, change inflation forecasts for countries such as Britain that import dollar-denominated goods and prompt Norges Bank to support the krone, which is linked to oil prices.
The Fed’s comments casting doubt on steady easing going forward could boost the dollar and tighten financial conditions around the world.
Investors rely on market predictions about central bank policy, and for now it may be best to ignore them.
5/ It’s back, or is it?
UniCredit’s raid on Commerzbank has sparked speculation that a long-awaited resurgence in European bank mergers and acquisitions could begin.
The Italian bank said it owns a 9% stake in the German bank, half of which it bought directly from the German government, and UniCredit Chief Executive Andrea Orsel said he would consider buying a further stake in Commerzbank or even buying it if it wanted to partner.
Investors are now watching to see whether Orsel can overcome many of the obstacles that have thwarted previous deals between European banks, including political opposition, and whether more banks will start exploring other deals.
The possibilities are endless. In the meantime, investors are buying bank stocks. Commerzbank shares are up about 20% in two days, while the European Banking Index is up almost 2%.
(Graphics: Prinz Magtulis, Kripa Jayaram, Sumanta Sen, Pasit Kongkunakornkul, Vineet Sachdev; Editor: Dhara Ranasinghe; Editor: Tomasz Janowski)
