RBA rate decision, Fed Chair Powell speech, U.S. PCE Inflation: Macro Week Ahead

Markets cheered as the Fed cut rates, but will they find the fuel to keep going?

• The Australian dollar will be vulnerable if the RBA begins to entertain rate cuts.

• Investors hope a Fed Chair Powell speech will inform the 2025 policy outlook.

• U.S. PCE data might revive worries about the pace of disinflation.

Stock markets pushed higher last week as the Federal Reserve gave traders the much-hoped-for 50-basis-point (bps) rate cut they were pining for. The central bank also promised 50bps in further easing this year and 100bps in 2025, which registered broadly in line with the markets’ thinking ahead of the announcement.

The bellwether S&P 500 stock index and its tech-oriented counterpart the Nasdaq 100 added 2.4% and 2.6% respectively, marking a slight slowdown from the prior week’s gains. Treasury yields inched higher as the markets digested the Fed’s messaging, gold rose and the U.S. dollar fell against most major currencies save the Japanese yen.

Here are the macro waypoints likely to shape what comes next.

Reserve Bank of Australia policy meeting

Australia’s central bank is expected to keep its target interest rate unchanged at 4.35% at this week’s policy meeting. Go Michele Bullock and her colleagues have been reluctant to join the rate cut push embraced by most central banks in the major economies. They continue to prioritize a post-COVID fight against inflation.

For their part, the markets have priced in 12bps in cuts by December, implying a 50/50 chance of a standard-issue 25bps reduction before the calendar turns to 2025. Traders have penciled in 95bps in cuts next year. This might turn out to be too timid as the economy hits the skids.

Purchasing managers’ index (PMI) data from Judo Bank and S&P Global showed economic activity shrank in September as the pace of contraction in the manufacturing sector accelerated while growth on the services side slowed to a near standstill. If the RBA softens its messaging and seems more open to easing, the Australian dollar is likely to fall.

Federal Reserve Chair Powell’s speech

The Fed delivered nearly everything the markets were hoping for with last week’s tectonic policy update. In doing so, it has seemingly locked itself into a commitment to cut rates by 25bps at each of its upcoming meetings in November and December. This probably means that speculation is now firmly focused on 2025.

With that in mind, traders will be keen to hear from Fed Chair Jerome Powell, who is scheduled to speak at the 2024 U.S. Treasury Market Conference. Most critically, they will want to get a sense of just how worried the central bank has become about the trajectory of U.S. economic growth.

Powell will no doubt try to appear reassuring, echoing his performance at the press conference following last week’s policy announcement. The risk now facing markets is that an optimistic view of the economy coupled with any hesitation to declare victory over inflation may trim next year’s rate priced-in rate cut tally. Wall Street may not like that.

U.S. personal consumption expenditure (PCE) inflation data

The Fed’s favored measure of inflation is expected to show headline inflation continued to cool in August, falling to 2.3% year-on-year, the lowest since February 2021.

However, the core measure excluding volatile food and energy prices—the focus for central bank officials—is expected to rise to 2.7%.

That is eye-catching divergence. If expectations are broadly met, the result would amount to the highest reading on core inflation in four months and the largest rise in the 12-month growth rate since September 2022. Such a result might work against next year’s rate cut bets, pulling upward on longer-dated yields and lifting the U.S. dollar.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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