Take Five: No Let-up by Reuters

(Reuters) – The turbulent activity seen in September is unlikely to ease in the near future as investors remain anxious ahead of pivotal macroeconomic events that may influence trading dynamics in the coming weeks.

Here’s a snapshot of what to expect in the markets this week, brought to you by our team in various financial hubs around the world.

1. PRICE IS RIGHT?

While investors are currently attuned to U.S. employment figures and economic growth, the consumer price data set to be released on September 11 could still create significant waves.

The market is analyzing how aggressive the Federal Reserve may be regarding rate cuts at its meeting on September 17-18, making every economic report crucial. Should inflation demonstrate resilience, this could lessen the likelihood of a 50-basis point rate cut—an option currently regarded as less probable than a more modest cut of 25 basis points. Conversely, if consumer prices show a sharp decline, it may signal greater-than-expected economic slowdown, potentially leading to larger cuts.

Economists surveyed expect inflation to have risen by 0.2% in August, matching its prior month’s increase.

2. ECB’S NEXT MOVE

The European Central Bank (ECB) is nearly assured to implement its second rate cut in this cycle; however, more important is the guidance on future actions.

Traders are now fully forecasting another cut after September, with nearly a 50% chance for an additional move later this year. Two months ago, traders were less confident about a post-September cut.

With a December rate decrease appearing likely, market participants are keen to learn about the potential for an October adjustment as well. ECB policymakers remain cautious, with some hesitant to commit to September cuts amidst differing views on managing inflation concerns amid a weak growth outlook.

Inflation was just above the ECB’s target at 2.2% in August, but ongoing pressure in services and core measures means some policymakers are advocating for more evidence that inflation can stabilize at 2% before embarking on further aggressive cuts.

3. BLACK GOLD

Investors are grappling with a dilemma regarding the bond and stock markets’ perspectives on the economy. Bonds are signaling a looming recession, whereas stock markets have been reaching new record highs, reflecting an underlying confidence in a smooth economic transition.

The gold-to-oil ratio, which indicates how many barrels of crude oil are needed to purchase an ounce of gold, is currently at its highest level since 2020. This ratio tends to fall with increased economic confidence, due to expected growth in energy demand, and rises amidst economic concerns and the potential for gold-favorable rate cuts.

Currently, gold prices are nearing record highs close to $2,500 an ounce, while oil struggles to maintain levels above $70 per barrel. Ultimately, either the stock market narrative or the bond market outlook must prevail.

4. STERLING JOBS

The Bank of England (BoE) has been swift in raising interest rates relative to its counterparts and is expected to proceed cautiously with cuts unless key data—such as the monthly wages report due on September 10—provides reassurance.

When the BoE initiated its first rate cut of this cycle on August 1, it stated it would monitor wage growth closely, as it is a significant factor for inflation. UK wages increased at their slowest rate in nearly two years for the quarter ending June 30, yet unemployment saw an unexpected drop, with the working population expanding significantly more than anticipated.

A weak jobs report could aid borrowers but may diminish the pound’s strength, which has been buoyed by expectations of sustained higher rates from the BoE. Bullish positions in sterling are primarily held by leveraged speculators, who might be prompted to sell upon early signs of turbulence to avoid margin calls.

5. PICKING A PREMIER

Japan’s next prime minister will inherit the responsibility of advancing reforms for corporate governance that have lifted stock prices and will oversee efforts to support the Bank of Japan’s tightening strategy after years of deflation, in addition to managing a substantial national debt that is the largest among industrialized nations.

Currently, Prime Minister Fumio Kishida is set to step down amid a slush-fund scandal. The field of candidates aiming to succeed him could approach 10 as campaigning kicks off on September 12, ahead of a party vote scheduled for September 27.

Prominent figures in the race include Shinjiro Koizumi, who advocates for deregulation, Shigeru Ishiba, a proponent of policy normalization before last month’s BOJ rate adjustment, and Sanae Takaichi, the leading female candidate who supports reflationary measures.

The BOJ operates independently, yet the government can influence its policies. The timing is particularly sensitive, with the central bank’s next meeting scheduled just a week before the ruling party’s vote.