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00:00 Ramzan
that all eyes will be on a fresh reading on inflation later this morning. The Fed’s preferred inflation gauge, the personal consumption expenditures price index or PCE index for September is out at 10:00 a.m. Eastern. Economists are forecasting total and core PCE, which takes out food and energy, to hold steady at 0.3% and 0.2% respectively on a month-over month basis, signaling that overall consumer prices are rising, but at the same pace as the previous month.
00:27 Ramzan
Well, let’s get more on this story. I’m joined by CIBC Chief International strategist Jeremy Stretch. Jeremy, thanks so much for joining us on Market Sunrise.
00:36 Jeremy Stretch
Hi Ramzan.
00:37 Ramzan
Now, I said that we are all eyes will be on this PCE number, but these are September’s numbers, so should we, will that really make much of a difference to next week’s rate decision?
00:52 Jeremy Stretch
Well, notionally, you would expect not. Certainly if the numbers themselves are broadly in line with the expectations that you’ve outlined. But clearly, if there were to be an unexpected uptick in terms of that core PC reading in particular in terms of the year-on-year rate and getting above the 3% threshold for the first time since spring 2024, that would make market pricing for the upcoming Fed decision a little more uh un a little more uncertain. But I think ultimately, if we see a number which is broadly in line with expectations, it leaves Fed rate cut expectations firmly entrenched into next week’s decision.
01:23 Ramzan
But looking further ahead, the market seemed to think they could be another two rate cuts in 2026. Are you of the same opinion?
01:34 Jeremy Stretch
Well, I think rates are going to be cut, but I guess the question is how far can and should the Fed be cutting rates? Now, of course, there is a big variable at hand in the context of the changing narrative or the changing composition of the Fed, which is clearly going to be influential through 2026. But from our perspective at CIBC, we do expect yes, the Fed to cut next week by 25 basis points. We would expect a further reduction of a similar magnitude in the first quarter, but then it would seem appropriate to us that the Fed would actually hold rates at that point. But clearly, the market is discounting a little bit more than that. And I guess that’s going to be the question that is going to be needing to be resolved as we go through to next year, is will terminal rates be somewhere close to 3% or that a little bit higher in line with our baseline assumption?
02:22 Ramzan
Well, the dollar has been under pressure as, you know, expectations are rising for rate cuts and it, I think it’s actually hovering near a five-week low right now. I mean, where do you see the dollar going against some of the major currencies, especially the Japanese Yen which is uh it’s particularly weak against?
02:50 Jeremy Stretch
Well, December is not usually a particularly encouraging month for dollar performance. It has been a month which has witnessed a significant dollar depreciation, certainly for the last six or seven years. last year being the exception. So I think the seasonal patterns would imply that we should continue to expect a chepening dollar. I think it is very much a function of how markets are interpreting the Federal Reserve narrative, and I think that will continue to underline that dollar downside bias. But as you mentioned, the BOJ and the expectations of the Bank of Japan are moving uh particularly in the opposite direction. So we now have a near 90% probability uh being priced by the market that the Bank of Japan will be hiking rates at their meeting which comes a week after the Fed. But now we’re also starting to see markets anticipating potentially a higher probability of additional policy tightening into 2026 and that is encouraging that Dollien move lower. Uh and accordingly, we are seeing the dollar losing some ground, not only against the Yen, but also to an extent against the Euro as well.
04:00 Ramzan
Well, interesting you brought up the euro there. Um I mean, how does the ECB and even the Bank of England, how do they compare to the Fed when it comes to easing in 2026 in your opinion?
04:15 Jeremy Stretch
Well, I think the ECB have got policy in their own words into a good place, and I think that implies that uh with rates at 2% in the Euro zone, that’s the midpoint of what the ECB would consider to be its neutral policy range. They are in a position where they can allow time to elapse and see how that policy easing actually works out. And I think ultimately we’re in a we’re in a period where the ECB are going to hold rates at that threshold, ultimately through the bulk of next year. And ultimately that also means the next move is more likely to be a hike than a cut. And I think that corresponds with the narrative of Euro trading higher into early 2026. From the Bank of England, well, it seems most likely than not that Andrew Bailey will swing from being uh holding rates at the November meeting to sanctioning a rate cut in December. But I think there could be further to come in the first quarter for the Bank of England, and I think that’s not necessarily priced for the market or in the market. And so I think that does potentially raise the risks of a little bit of Sterling under performance in the first quarter, although I would be particularly looking for that against the euro rather than necessarily against the US dollar.
05:23 Ramzan
Jeremy Stretch from CIBC, always a pleasure to talk to you here on Market Sunrise. Thanks.