Go Big or Go Home – Reuters

(Reuters) – Following a significant interest rate adjustment by the Federal Reserve, both Switzerland and Sweden are expected to implement more rate cuts in the near future. This comes amid pressures indicated by U.S. inflation data and global business activity surveys.

In political developments, Japan’s ruling party is set to select its next leader, who will become the new prime minister, while voters in Sri Lanka are preparing to choose a president.

Here is a week-ahead overview of world markets, contributed by Lewis Krauskopf in New York, Kevin Buckland in Tokyo, and Libby George, Amanda Cooper, and Dhara Ranasinghe in London.

1/ FRONT-LOADERS

Sweden and Switzerland’s central banks are next in line for potential rate cuts. Market analysts predict that both are likely to lower their benchmark rates in forthcoming meetings this week, with the possibility of front-loading these cuts, implying that any policy easing in 2025 may be minimal.

The Swiss National Bank was first to initiate rate cuts in March. Current market expectations regarding the magnitude of the anticipated cut this Thursday are mixed. The recent appreciation of the Swiss franc, which is nearing its strongest position since 2015, complicates the SNB’s objectives since inflation remains lower than anticipated.

In Sweden, the Riksbank is widely expected to implement a 25 basis point cut on Wednesday, given that inflation is substantially below the bank’s target. There is also a strong likelihood of a 50 basis point reduction in November.

2/ INFLATION IN FOCUS

The Federal Reserve’s preferred inflation measure, scheduled for release on September 27, will indicate whether price pressures continue to diminish, even as the Fed has begun withdrawing from its restrictive monetary policy aimed at stabilizing the economy.

According to a recent poll, the personal consumption expenditures (PCE) price index for August is expected to reflect a 2.5% annual increase. The Fed’s updated economic forecasts estimate an annual rate of the price index would fall to 2.3% by the end of the year and further to 2.1% by the end of 2025.

Investors can anticipate new data on consumer confidence and durable goods in the upcoming week.

3/ RECESSION WATCH

Flash business activity data beginning on Monday will offer updated insights into the global economic landscape. The composite Purchasing Managers Index (PMI) for the eurozone has remained in expansion territory for the past six months, while the UK has shown similar trends for ten months, supporting the strength of the British currency.

Market sentiment is currently optimistic, as many believe the recent half-point rate cut by the Fed could prevent a U.S. recession and, by extension, a global one. Economists surveyed estimate the likelihood of a recession is approximately 30%, a figure that has remained stable throughout the year.

However, challenges persist. In Germany, a key European economy, the PMI has dipped deeper into contraction territory below the 50 mark, indicating weak sentiment. Additionally, ongoing struggles in the Chinese economy may further impact global prospects.

4/ PICKING A PREMIER

On September 27, Japan’s ruling party will elect a new leader and, consequently, a new prime minister. The race features nine candidates, with three main contenders reflecting diverse policy perspectives.

Sanae Takaichi aims to become Japan’s first female prime minister and advocates for reflation, critiques the Bank of Japan for premature rate hikes. On the other hand, Shigeru Ishiba, who has historically opposed past monetary stimulus, asserts that rate hikes have been on the right track. Shinjiro Koizumi, the son of the former prime minister, has committed to respecting the independence of the Bank of Japan.

This leadership contest complicates the central bank’s decisions irrespective of the outcome. A snap election is anticipated in late October, likely hindering policy actions during that month’s meeting.

5/ TOO CLOSE TO CALL

Sri Lankans will have economic issues at the forefront of their considerations as they head to the polls on Saturday for a closely contested presidential election.

The nation’s economy, which is recovering from a severe crisis, is projected to return to growth in the coming year. However, the austerity measures and hardships faced by citizens to facilitate this recovery could lead many to favor opposition candidates over the incumbent, Ranil Wickremesinghe.

Two leading candidates have expressed intentions to review or amend the terms of the International Monetary Fund bailout, while one has proposed a novel approach to debt restructuring. This situation raises the potential for further political and economic uncertainty moving forward.