The Global Week Ahead: Shouldn’t, But Probably Will

Next Week's Risk Dashboard

• FOMC — A reluctant forecast
• BoJ — Back-to-back?
• Canadian CPI — One of two
• Will Canada’s Investment Summit be bold enough?
• BoE — Maybe next time
• UK jobs, wages, CPI and retail will crowd the BoE
• ECB wage tracker to inform second-round pressures
• BCB — Is a halt in the works?
• US retail sales could rebound
• Tracking China’s economy
• Should countries retaliate? Does it work?

Chart of the Week

SHOULDN’T, BUT PROBABLY WILL

A fascinating week of developments lies ahead with a cacophony of major global central banks weighing in. They will do so amid high uncertainty over the course of future events in the Middle East and implications for energy prices and other commodities amid efforts to possibly arrange a meeting of Gulf states while satellite imagery shows intensifying movement and development around Pickaxe Mountain’s nuclear site in Iran.

Three of the biggest central banks (Fed, BoJ and BoE) will deliver decisions. The Fed and BoJ are expected to hike. Key will be the dance moves put on by Kevin Warsh and Kazuo Ueda and their respective colleagues. While we expect a hike, I don’t support the Fed moving in this direction and will explain why.

As others tighten monetary policy, Canada will focus upon inflation and its investment narrative. CPI will be one of two before the next BoC decision that is increasingly likely to deliver a hike on October 28^th but with a lot of runway between now and then. A Fed hike and even wider policy rate spread would amplify pressure on the BoC (chart 1).

PM Carney will lead the Canada Investment Summit starting Monday evening through Tuesday when a who’s who of heavy hitters across pensions, asset managers, sovereign wealth funds and other longer-term investors descend upon Toronto. It’s an exciting time in Canada. See last week’s weekly for perspectives on the investment agenda that could be more ambitious than C$1 trillion over the next five years by relating it to key benchmarks. Implementation and execution risks are high.

Throughout it all will be the customary line-up of macro indicators will spread the focus across multiple markets.

I’ve also offered a defence of retaliation in trade policy by referencing the views of a giant in the economics profession, empirical studies, and my own beliefs.

FOMC—A RELUCTANT FORECAST

The FOMC is expected to hike its fed funds target rate range by 25bps with the upper limit of the range rising to 4% on Wednesday. The statement and revised Summary of Economic Projections will be released at 2pmET and Chair Warsh’s press conference will begin at 2:30pmET.

I would be surprised if the dot plot did not show an upward shift in the median projection to show another 25bps hike by year-end, but I think it’s a stretch to assume the Committee will chase the 50bps of additional hikes being priced over October and December—let alone most of 100bps of total hikes that is priced by about this time next year or so.

The strongest argument for hiking is that Chair Warsh has probably boxed himself in with his high deference to markets. Surprises have happened (chart 2) but more often around sudden shocks (pandemic, GFC, dot com). He is likely to take the roughly 22bps that is priced and deliver on a 25bps hike and with enough support on the Committee. History shows an exceptionally low likelihood of passing on a priced hiked as Jay Parmar’s chart of the week illustrates on the cover. To do otherwise would curiously ease financial conditions and go against his hawkish-sounding narrative; if you don’t hike when it’s priced, then when? If he doesn't hike, then markets may pay less heed to his hawkish laments. 

Yet I believe that hiking would be policy error. It isn’t what the Fed should be doing. The inflation threat is overstated and so is job market resilience.

Regarding nonfarm payrolls, the only reason the report posted a gain of 162k jobs in August was because of a fishy seasonal adjustment factor as argued here. If an SA factor close to recent experiences was used instead of the highest factor in the past ten years, then nonfarm would have only risen by an estimated 15k. This move coincided with the fact that Trump’s BLS Commissioner took the reins after the July payrolls report.

Furthermore, while modest, annual revisions to March 2026 nonfarm payrolls recently surprised lower with -178k jobs removed against expectations for at least that many to be added.

On inflation, there are similar data reliability issues such as a record high share of the basket estimated through proxy methods rather than directly (chart 3).

Nevertheless, a core issue is whether the Fed would tighten at the wrong point when inflation is arguably improving. We are tracking core PCE inflation at 0.2% m/m on a three-month moving average basis during June through August. August figures arrive at month’s end, but adjusting core CPI to PCE weights and paired with pertinent producer price categories translates into a 0.18% m/m reading for core PCE. There have been times when this approach has underestimated core PCE given other methodological differences, but it would be a stretch to round up to 0.3—and an even bigger stretch for this to be impactful to the recent trend.

The point is that the measure we once understood to be the FOMC’s preferred inflation gauge has been cooling over recent months. It may be premature to declare victory but it’s also premature to declare a renewed war.

More important is that the bulk of the inflationary pressures being witnessed seem to be more about relative price changes rather than generalized inflation. Monetary policy cannot necessarily influence narrow prices; it’s a blunt instrument to be targeted toward broader forces.

It can be dangerous and misleading to remove data that could carry important signals. I don’t think that’s the bigger risk here. The bigger risk lies in misinterpreting what I think is very narrowly based pressure.

Chart 4 shows that much of the pressure on core PCE inflation has been due to two categories—computers and software that reflects AI-driven expansion, and portfolio management services that may reflect stock market gains and more complicated tax changes. Remove just those two items and core PCE is about half a percentage point lower than reported in y/y terms.

In the latest CPI report, wireless telephone services were up 5.9% m/m SA at a 1.369% weight; removing it would have had core CPI landing on consensus at 0.2% m/m.

Chart 5 shows trimmed mean inflation that removes 16% of the CPI basket in the upper and lower tails of the ranked distribution of prices. Chart 6 shows trimmed mean PCE and weighted median PCE (the 50^th percentile price) and how both are well below official core PCE inflation and trending lower toward the 2% headline PCE target. Neither of these central tendency measures of inflation are screaming out to do something about inflation.

What we also find challenging is understanding what measures of inflation the new Chair prefers. He has thrown open this question—but not the 2% target itself—to be investigated by the five task forces. This uncertainty has been a driver of turmoil across the rates complex.

Lastly, there was once upon a time when central bankers were forward-looking. We have trouble understanding the FOMC’s current model in that regard. It appears highly oriented toward backward-looking data and marked by the Chair’s frequent references to the past five years of inflation. Bygones be bygones is not the rallying cry of this Fed which at times almost sounds like it is entertaining more of price level targeting mindset.

In our view, the current stance of monetary policy in the context of considerations is tight enough to bring inflation back to the 2% inflation target in the medium-term. Our large scale macroeconometric model says so, for one. Our stylized facts and narrative-based approaches reinforce this stance. US fiscal policy is turning toward being a drag effect on growth. The supply side is more likely to be undergoing a positive shock through AI and productivity gains than the negative shock of yesteryear. The forces in play raise our concern about the outlook for the US consumer. The housing market is for all intents and purposes dead in the water.

CANADIAN CPI—ONE OF TWO

Canada refreshes CPI for August on Monday morning. It’s one of two CPI reports due before the next Bank of Canada decision on October 29^th. The pair of readings could determine the course of action at that meeting while still being dependent upon other data and developments and the degree to which the BoC places emphasis upon refreshed forecasts.

I’ve estimated a mild 0.1% m/m seasonally unadjusted rise in total CPI that would equal roughly 0.3% m/m SA. The year-over-year rate may accelerate to 3.2% from 3% previously. Gas prices are unlikely to be a meaningful contributor in unadjusted m/m terms. August usually sees little change in unadjusted overall prices compared to more seasonal swings at other times of the year. Key will be whether core services inflation remains hot (chart 7) which some measures suggest might be the case (chart 8).

Key, however, are the core inflation readings. I’ve roughly estimated 2.2% y/y for traditional core (1.9% prior). The other core readings are impossible to measure in m/m SAAR terms.

On average core readings have not been soft (charts 9, 10). Traditional core CPI has been above 3% m/m SAAR for three straight months. Weighted median CPI was up by 2.7% m/m SAAR in July but cool for the two prior months after previously accelerating. Trimmed mean CPI was up by 2.8% m/m SAAR in July and is averaging 2.2% m/m SAAR on a 3moMA basis.

In year-over-year terms, total CPI of 3%+, CPI ex-gas of 2% y/y, traditional core at 1.9%, weighted median CPI at 2.0% and trimmed mean CPI at 1.9% are all converging around 2% or higher. A caution is that weighted median and trimmed mean are not spot y/y measures versus compounded m/m readings that turn slowly as new data comes in.

The point is that multiple inflation readings don’t really support hanging out at the low end of the neutral rate range for the policy rate. When you’re on target or above, you should probably be rebalancing the risks in a careful way toward the middle of the neutral rate range at a minimum.

Mind you, when I see shelter CPI at +/-0.053% m/m in seven of the past eight months it kind of raises one’s spidey sense toward data reliability.

On the path to the next BoC decision will also be the fresh consumer and business surveys that have been showing elevated inflation expectations and likely to move higher.

BOJ—BACK-TO-BACK?

Consensus unanimously expects the Bank of Japan to hike by 25bps on Friday. Markets are fully priced for a hike and one more before year-end.

One reason for a hike stems from guidance from Bank of Japan officials. Board member Kazayuki Masu recently said “The Bank will continue to raise the policy interest rate. What is most vital from now on is to ensure that the underlying inflation rate does not significantly exceed 2%.”

Board member Hajime Takata shares similar sentiment. Deputy Governor Ryozo Himino recently said “I believe the Bank should continue to raise the policy interest rate.” Their speeches are available here.

The BoJ constantly emphasizes that the policy rate is below the neutral rate range by contrast to elsewhere (chart 11).

Data also supports further tightening. Tokyo CPI for August was up 1.9% y/y with core measures close to this. Measures like import prices and producer prices are ripping higher (chart 12). Real wage growth continues to accelerate (chart 13). Multiple years of Shunto Spring wage negotiations have been posting solid gains (chart 14). In all, this feeds concern about second-round price pressures.

Key will be fresh forecasts that are presented and Governor Ueda’s press conference. Verbiage that opens the door to back-to-back moves or a more gradual path may be the most important; gradual and perhaps JGBs and the carry trade are a little more at ease whereas back-to-back moves are not priced.

BOE—MAYBE NEXT TIME

Central bankers have a reputation for moving together as one big herd. Will the Bank of England buck the herd on Thursday by holding? We think so, for now. A hold is 80% priced and consensus is unanimous.

Expect dissenters who are chomping at the bit to hike after the 6–3 hold-hike vote the last time.

Governor Bailey recently sounded patient, however, when he remarked that “We’re seeing quite subdued second-round effects. I think we’ve seen a softening labour market for some time now. I’ve taken the view that I think we can watch this situation for the moment.”

Ultimately it may boil down to a Clint Eastwood line in managing potential pass through of high and rising energy and other commodity prices—do you feel lucky?

Wage growth has accelerated (chart 15) and recent economic indicators suggest that the economy remains resilient. 

Still, an upside surprise on August inflation—due just the day before the BoE decision—could tip the balance on guidance with markets already pricing a hike in November and another one in December.

BCB—IS A HALT IN THE WORKS?

Brazil’s central bank isn’t so much on my bingo card for this week with the bulk of the focus upon the Fed and Bank of Japan, but it is widely expected to go the other direction.

Consensus expects the Selic rate to be cut by 25bps on Wednesday afternoon after the FOMC. It would be the fifth straight cut but would still leave the rate at an elevated 13.75%. From a tight stance, BCB may nevertheless be concerned about soaring energy prices and high inflation expectations while fiscal stimulus hangs in the air around the October 4^th elections. It may be prudent for the central bank to strike a more cautious tone toward future moves.

SHOULD COUNTRIES RETALIATE—AND DOES IT WORK?

A common argument among economists is that countries should not retaliate against tariffs imposed upon them by hostile trading partners. It imposes harm on the local populace and doesn’t work anyway.

I’ve long argued the opposite in support of reasonable, targeted retaliation in ways that seek to minimize the effects on the retaliating country. Retaliation can make your adversary think twice about the next time they come charging at you by not making it costless for them to do so. Retaliation can fend off demands to sign bad deals you could be stuck with for a very long time at a higher cost than the cost of retaliation. Dealing with adults applies the same principle as dealing with aggressors on the playground.

In fact, none other than Adam Smith supported retaliation as noted in this post that was brought to my attention and is drawn from the original text of The Wealth of Nations:

"There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods. To judge whether such retaliations are likely to produce such an effect, does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles, which are always the same, as to the skill of that insidious and crafty animal vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs."

I consider one of the greatest classical economists to be good company on this issue.

There is also supporting empirical evidence on the effects of retaliation on US midterm election results drawn from the 2018 experience through a combination of empirical control studies and more circumstantial evidence.

Here is a general article on what happened specifically in districts that Canada targeted in 2018. 

This study looked at the effects of retaliatory tariffs by China, Canada, Mexico and the EU on the 2018 midterms and found some evidence. They figured that the Republicans would have lost ten fewer House seats if not for the trade war. They also figure that a one-standard deviation increase in retaliatory tariff exposure reduced the Republican vote share by 1.2 ppts which made the difference in tight districts.

This study argued that Republican candidates in counties highly exposed to retaliation performed 1.4–2.7 ppts worse than they would have otherwise. That could easily make the difference in tight races.

Today may be very different but it’s hard to predict how. Trump has record low polling, affordability issues are much more severe than in 2018, tariffs are more prevalent and there are many more complicated issues than just trade wars that the US administration started against multiple countries and regions. I suspect that the overall picture of affordability including retaliatory tariffs as a small subset of this will be a bigger factor in these midterms but it’s hard to disentangle the effects.

Perhaps economists who argue against retaliation should respect the evidence, be more open-minded toward conducting further research, and are unaware of Adam Smith’s support. It would seem that there is method behind the apparent madness of standing up to US trade aggression.

GLOBAL MACRO—IN THE SHADOWS OF CENTRAL BANKS

Central banks will dominate this coming week’s attention across global markets but there will still be several nuggets on the global macro calendar. I’ve partnered with my colleague Jay Parmar on this section.

Canada will mainly focus on CPI and the Investment Summit but there will be a few other minor gauges. Manufacturing sales are expected to post a small decline (Monday) and so is wholesale trade (Tuesday) based on advance Statcan guidance. Home resales during August will try for a fifth straight monthly gain (Tuesday) and housing starts should rebound in August (Wednesday). Producer prices during August may continue to inform the risk of pass through into CPI when they arrive on Thursday (chart 16). Wednesday’s not-minutes account of the BoC’s recent meeting may be stale after CPI but could inform more of the dialogue around the BoC’s recently hawkish pivot.

The Federal Reserve will dominate the tone for US markets and much of the global market tone, but a few other data releases could be influential at the margin. Retail sales during August will be the biggest attention grabber; higher auto sales combined with gasoline prices could drive a rebound from July’s disappointment alongside firmer core sales. Industrial output during August is expected to rise at a mild trend pace.

The focus at the start of the week will be on China's August activity data, which will provide further insight into third-quarter economic growth after July figures pointed to continued weakness in household spending and private investment. Retail sales are expected to remain subdued, while private investment is likely to soften further. Industrial production, by contrast, has proven more resilient despite disappointing in July and is expected to rebound in August, supported by continued strength in AI-related demand. Meanwhile, home prices are expected to continue declining modestly.

Attention will then shift to the UK labour market report on Tuesday, followed by inflation data on Wednesday, ahead of the Bank of England's policy decision on Thursday. While the data release is unlikely to alter the policy decision itself, the upcoming readings could influence the bank's forward guidance and the degree of hawkishness in its communication.

UK payroll employment is expected to post another decline in August, marking a seventh consecutive monthly drop. In contrast, the lagged Labour Force Survey is expected to show modest employment growth in July, with the unemployment rate holding steady at 4.9%. Emphasis will remain firmly on wage growth, which has averaged around 6% on a three-month annualized basis in recent months.

August inflation data, due Wednesday, is expected to show a pickup in headline and services inflation, reflecting the pass-through of higher energy prices anticipated by the BoE. The key will be core inflation at the margin after both the June and July readings came in firmer than is typically observed for those months.

The ECB will also release an updated Wage Tracker on Wednesday, incorporating recently signed collective bargaining agreements. While negotiated wage pressures remained broadly stable in the first half of the year, newly signed agreements amid higher energy costs suggest wage growth is beginning to firm again, reaching around 2.8% by early 2027 (chart 17). Given the prominent role of collective bargaining in Europe, the update will be closely watched for signs that higher commodity prices are feeding into broader wage dynamics and generating second-round inflationary effects.