Summary
United States: Rate Cuts Incoming
- The August jobs report did little to settle the debate if a 25 bps or 50 bps rate cut is coming this month. We’re sticking with 50 bps, but acknowledge 25 bps as a real possibility. Firms continued to hire in August and the economy kept expanding. Attention is already turning to next week’s CPI report for further clues on the degree of easing.
- Next week: NFIB Small Business Optimism Index (Tue.), CPI (Wed.)
International: Bank of Canada Cuts Interest Rates, Signals Further Easing to Come
- The Bank of Canada (BoC) cut its policy rate by 25 bps this week, citing downside risks to growth and an overall slowing in inflation. The central bank also signaled further easing, though given lingering concerns around elevated services inflation and wage growth, we expect a steady rather than accelerated pace of BoC rate cuts. In this week’s economic figures, Brazil reported strong GDP growth, Australia soft GDP growth, China mixed August PMIs and Japan firm wage data.
- Next week: Brazil CPI (Tue.), U.K. Monthly GDP (Wed.), European Central Bank Rate Decision (Thu.)
Interest Rate Watch: Rate Cut at Sept. 18 FOMC Meeting: 25 bps or 50 bps?
- The weaker-than-expected labor market report for August kept a 50 bps rate cut at the Sept. 18 FOMC meeting firmly on the table. The size of the rate cut—25 bps or 50 bps—will depend crucially on August CPI data, scheduled for release next Wednesday.
Credit Market Insights: Tight Spreads Signal Optimism Despite Labor Market Worries
- Recent data have shown that spreads for investment-grade and high-yield corporate bonds have continued to tighten, signaling optimism for the future of the U.S. economy remains high. While spreads have generally been performing better, investors still remain cautious.
Topic of the Week: Inverted Yield Curve Era Nearing an End
- The spread between the yields on the 10-year Treasury and the 2-year Treasury notes, a popular recession indicator, turned positive for the first time in 26 months at the close on Wednesday. Yet, there are reasons to question the true predictive power of the yield curve on the likelihood of a recession in the real economy.
