Busy September

In the US, the employment report for August has confirmed that the labour market is cooling, but by historical standards this still retains all the features of a very soft landing: job creation remains positive, and wage growth remains robust. Still, this was enough to re-ignite the discussion in the market on the possibility the Fed resorts to a 50-bps cut next week. We remain unconvinced. Starting the easing phase with such a big move would set the tone for the entire trajectory – in terms of market pricing – while we do not think the FOMC has made up its mind on the severity of the incoming downturn. Keeping to a 25-bps cut while making it plain in the press conference that the Fed would not hesitate to cut “big” and/or “fast” should the need subsequently arise would be simpler in our view.

The ECB needs to decide before the Fed. While there is little suspense on cutting by 25 bps this Thursday, the market will focus on any hints of “forward guidance” on the next steps from Christine Lagarde. We think she will keep her cards close to her chest, since the debate at the Governing Council is still in full flow. The very latest dataflow plays in the hands of the doves though: the details of the Euro area national accounts for Q2 confirm that businesses are increasingly offsetting the push from labour costs by reducing their margins.

With poor demand in Europe and the beginning of a slowdown in the US, cyclical developments in China – as a potential “consumer of last resort” for the world economy – take a specific importance. We add to our generally cautious Chinese outlook an exploration of another policy issue for Beijing: the need to expand the tax base, now that land-use sales can no longer fund a large share of public investment, while household spending is already weak.

Finally, the appointment of a Prime Minister in France does not fully bring clarity to policymaking in Paris. The budget bill may have to be postponed by a few weeks to allow for delicate compromises to be drawn.