Rev Up for Q4 – Reuters

Financial Markets Anticipate Interest Rate Cuts Amid Economic Uncertainty

Financial markets are gearing up for the fourth quarter with heightened expectations for a decline in global interest rates, which have remained elevated over the past few years. The primary concern now is whether the economy will experience a swift downturn or a more gradual slowdown.

As the third quarter comes to a close, it has been marked by considerable volatility. The month of August witnessed significant unrest, highlighted by the Japanese yen’s unexpected fluctuations, coinciding with declines in major tech stocks and growing anxieties among central banks regarding their economies.

Despite previous upheavals, stocks have shown resilience, and the yen is poised to record its best quarterly performance since the 2008 financial crisis. Global borrowing costs and oil prices have both fallen nearly 15%, and China has initiated its stimulus measures to bolster its economy.

Looking ahead, the U.S. election in November, featuring candidates Donald Trump and Kamala Harris, is set to dominate the final months of the year.

The Federal Reserve, having started its rate-cutting cycle with a significant reduction in mid-September, continues to focus on employment trends as it gauges the urgency of further monetary policy adjustments. Investors await key labor market data to determine if it aligns with Fed Chairman Jerome Powell’s optimistic view on cooling inflation and sustained growth. A weak labor market could heighten concerns about an impending economic downturn, while robust job growth might lead to expectations that the Fed will moderate its rate cuts to prevent inflation from rising again.

Economists predict the U.S. economy added a median of 145,000 jobs in September, slightly above August’s figure.

In Asia, factory activity data from China will be closely monitored, particularly after the country announced its most substantial stimulus package since the pandemic to support its struggling economy. Although it may be too early to gauge the full impact of these measures, the latest numbers indicated a continued decline in factory activity, marking five consecutive months of contraction.

In Thailand, a meeting between the government and the central bank regarding domestic inflation targets and the strength of the baht will also be significant as they have been at odds about interest rate cuts.

Meanwhile, in the United Kingdom, the Bank of England is perceived to be lagging behind other major central banks in adjusting interest rates. With upcoming data on the country’s second-quarter GDP unlikely to lead to immediate changes in policy, concerns persist about inflation in the economy. The new Labour government has raised alarms about the nation’s financial situation, which will be addressed in next month’s budget, leaving consumers feeling particularly downcast. Data on mortgage lending and consumer credit are expected to offer some much-needed optimism.

In the eurozone, inflation figures set to be released will draw attention as the European Central Bank evaluates its approach to potential rate reductions in October. Recent consumer price data from France and Spain indicated lower-than-expected inflation rates, leading economists to believe the overall eurozone figure may dip below the ECB’s 2% target for the first time since June 2021, driven by falling energy prices. This development has shifted investor sentiment, with many now anticipating a greater likelihood of a rate cut than previously thought.

With differing views on inflation trends, policymakers are bracing for a debate over the direction of future monetary policy.