Introduction

Institutional resistance to further US rate cuts is only one of the highlights of a very busy economic week that also included a rare repo spike in the short-term funding market, one that has people asking themselves how healthy the global financial system really is right now. But we'll get to that later as well as Japanese consumer prices and merchandise trade and also Chinese industrial production. First up will be the week's monetary policy rundown where the sounds of disagreement at the Fed can be heard behind the boardroom walls.

The economy

Monetary Policy

As fully telegraphed but nevertheless masking deep division, the Fed cut its policy rate on Wednesday by an incremental 25 basis points to a range of 1.75 percent to 2.00 percent with an implied midpoint of 1.875 percent. The vote was seven to three and was lopsided. James Bullard of St. Louis dissented wanting a 50 basis point cut while Esther George of Kansas City and Eric Rosengren of Boston both dissented on the other side, once again voting for no cut at all. There were expectations that quarterly FOMC forecasts would pencil in one more rate cut this year but the median showed no change, a big surprise implying that the "mid-cycle adjustment" in policy announced at the July meeting has already come and gone. Unlike the forecasts, there were no surprises in the economic assessment with the labor market described as strong and economic activity as moderate and with household spending upgraded from "picking up" in the last two statements to "rising at a strong pace". But business spending was understandably downgraded, from "soft" to having "weakened" with the word "exports" now inserted in the business assessment and also described as having weakened. This addition underscores the importance of ongoing global risk. Inflation was once again described as "running below" the Fed's 2 percent target.

The range of opinions on these assessments isn't known but the conclusions drawn by the policy makers have a striking range, underscored by the FOMC forecasts which had even more surprises in store. Forecasts show seven of the 17 total members expecting one more 1/4 point cut before year end with five members seeing no further cuts and five wanting a rate hike (that's right an old fashioned rate hike) back above 2.0 percent. Unanimity and muted debate is the usual atmosphere at the Fed. Perhaps not anymore.

With only seven of 17 seeing another rate cut this year (the specific split among the 10 voting members is unknown), there's no guarantee that another rate cut is on the way no matter what the markets are pricing in. Jerome Powell at his press conference would not, even when pressed, repeat the "mid-cycle adjustment" theme. Yes, this could imply that the voting majority on the FOMC, despite internal resistance and in contrast to the FOMC forecasts, have now swapped out the adjustment phase of accommodation in favor of a long term policy trend. Yet Powell also stepped clear of this conclusion, saying that policy bias is now no longer part of the Fed's communications effort and that whatever move the Fed makes next will be based on a careful assessment of incoming economic data. What Powell did say with certainty was that, in a reflection of trade tensions, the global economy is weakening, especially in Europe and China, and that Brexit is an additional risk. These risks for the US, he said, are centered on the nation's manufacturing sector amid what he said are weakening expectations for business investment that stand in contrast to the solid strength right now in consumer spending.

Another comment of note is that Powell is now cool to the once fashionable idea that a big rate cut, as opposed to the small ones of the last two meetings, is advisable when rates move toward zero, that a large rate cut could have an outsized stimulative impact and in theory would limit the extent of total rate cuts needed. Disowning this strategy implies that, if economic data do cool, a slow incremental descent toward zero may be what to expect. As far as negative rates go, Powell, unlike President Trump, isn't a great believer, stressing his own preference for the tools used in the 2008 financial crisis, not negative rates but instead large-scale asset purchases together with strong forward guidance

There were several other central banks in the week announcing their decisions and none, despite the risk of unwanted currency appreciation, felt the need to cut rates, at least for now. The Swiss National Bank on Thursday, no doubt relieved that euro weakness prompted by last week's ease by the European Central Bank was short-lived, opted to leave its key policy rate unchanged at minus 0.75 percent. This is not to say that the Swiss central bank is happy with current levels of the Swiss franc but, rather, that for the time being it would prefer to keep its powder dry. With the Swiss franc slightly firmer than at the time of the last monetary policy assessment in June, the SNB once again described its currency as "highly valued". Inevitably, the central bank re-emphasized its willingness to intervene as and when it believes appropriate to counter upside pressure on its currency.

One reason the SNB didn't cut rates is concern about the impact of negative rates on bank profitability. This has led the SNB to modify the mechanics of its deposit facility. Negative interest will continue to be charged on the portion of banks' sight deposits at the central bank that exceeds a certain exemption threshold. However, this exemption threshold will now be updated monthly to reflect developments in banks' balance sheets over time. The adjustment raises the exemption threshold for the banking system and reduces negative interest income for the SNB. The new threshold calculation comes into effect on November 1 and is similar to the 2-tier deposit system announced by the ECB last week.

Turning back to the Swiss franc, its impact on GDP was reflected in a downgrade to the SNB's economic forecasts. These now put growth this year at 0.5 percent to 1.0 percent, a sizeable reduction from June's 1.5 percent call. Hand in hand with this, the conditional inflation projection was similarly trimmed. The rate in 2019 is now put at just 0.4 percent, down from 0.6 percent last time, and in 2020, at an even lower 0.2 percent, some 0.5 percentage points less than in June. Even by the middle of 2022, CPI inflation is forecast at only 1.1 percent.

The Bank of England is one bank that hasn't been under much heat at all but may soon be. For now, the BoE met market expectations on Thursday and held Bank Rate once again at 0.75 percent and QE at £445 billion (of which gilts £435 billion). The vote was another unanimous nine to zero, also in line with the consensus and there was little new of any major significance in the statement. Yet exceptionally high levels of uncertainty facing policymakers are evident in the accompanying minutes, as officials wait to see how Brexit finally pans out. Forward guidance was untouched and (crucially) assumes a smooth transition and some recovery in global growth: "... the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2 percent target". The big caveat remains, however, with the BoE noting that possible monetary policy responses to Brexit, whatever form they take, will not be automatic and could be in either direction.

In terms of the UK economy, Brexit-related volatility continues to cloud the underlying picture but the bank now sees 0.2 percent quarterly growth in the current period. However, while acknowledging that wage pressures have intensified, the overall assessment would seem rather more dovish. In particular, underlying growth is thought to have slowed and a degree of excess supply to have opened up within companies. Moreover, the labour market is not seen to be tightening further and official and survey measures have shown smaller gains in employment. Tightening bias or not, taken at face value the BoE's statement suggests that even without Brexit, the MPC might not be in any hurry to tighten anyway.

One bank that seems eager to act but, hamstrung by negative rates, may have no where to go is the Bank of Japan which on Thursday also left its policy settings unchanged. As it has been since early 2016, the BoJ's short-term policy rate for excess reserves remains at minus 0.1 percent while the target level for the long-term 10-year yield remains at around zero percent. The BoJ's policy framework also involves officials adjusting the pace of their purchases of Japanese government bonds in order to keep the 10-year yield close to its zero target. For now, officials continue to believe that purchasing these bonds at an annual rate of Y80 trillion is consistent with meeting this target. The vote at the meeting was seven to two.

Officials retained their assessment that Japan's economy is on a "moderate expanding trend" and that this is likely to continue. They also retained their view that inflation is likely to increase "gradually" toward their target level of 2.0 percent. Officials, however, now consider that downside risks to the global economy appear to be increasing and that "it is becoming necessary to pay closer attention to the possibility that the momentum toward achieving the price stability target will be lost". And though officials have promised to act "without hesitation" to ease policy further if inflation goes the wrong way, BoJ Governor Haruhiko Kuroda stressed in his post-meeting press conference that this momentum hasn't been lost.

Now let's turn to economic data in the week that have immediate relevance for monetary policy. And the first are the latest inflation data out Japan which, released on Friday following the BoJ meeting, may not confirm the loss of positive momentum but much of anything positive is difficult to see. The data for August show a further fall in headline inflation and little change in measures of underlying inflation. This provides more evidence that reaching the BoJ's 2.0 percent inflation target remains a slow and elusive process. Headline consumer prices were only 0.3 percent higher than in August last year, down from 0.5 percent in July and showing the slowest pace since February. The decline reflects a fall in food price inflation from 0.9 percent in July to 0.1 percent in August, with the year-on-year increase in utilities charges also falling from 2.0 percent to 1.2 percent. Price changes were steady for housing and transportation. Core CPI, which excludes fresh food prices and is tracked in the accompanying graph, was 0.5 percent higher than last August, down from 0.6 percent in July. On the month, the index managed only a 0.1 percent rise as it did in July.

Sticking with Japan, the slowdown if not contraction underway in global trade would appear to be a central and contributing factor for the disinflation evident in many inflation reports. Japanese exports fell a year-on-year 8.2 percent in August after dropping 1.5 percent in July, while imports fell 12.0 percent on the year after dropping 1.2 percent previously. The greater fall in imports than exports actually makes for a narrower trade deficit in August, at ¥136.3 billion from ¥250.7 billion in July in what will technically help Japanese GDP though masking demand constriction on both sides of the ledger. These results are broadly in line with previously released trade data out of China and Singapore with weakness in Japan broad-based across major trading partners. Year-on-year growth in exports to the US weakened from an increase of 8.4 percent to a drop of 4.4 percent in August, and exports to the European Union fell 1.3 percent on the year after rising 2.2 percent previously. Japanese exports to China fell 12.1 percent on the year in August after dropping 9.3 percent in July.

Speaking of China, the week opened with a slew of economic reports that on net point not to strength but to sagging momentum. Chinese industrial production did advance 4.4 percent in August compared to last August, but this is down from July's 4.8 percent pace and was well below the consensus forecast of 5.3 percent. It is also the weakest growth since 2012. Slowing was broad-based with growth in manufacturing output down 2 tenths to 4.3 percent on the year with slowing reported in textiles, chemicals, general equipment, and communication equipment. On the plus side was a smaller drop for auto production and stronger growth in electric machinery and steel output. Like manufacturing, mining output also weakened, up 3.7 percent on the year after increasing 6.6 percent previously, while year-on-year growth in utilities output slowed from 6.9 percent to 5.9 percent. Other China data that opened the week included retail sales where annual growth slowed 1 tenth to 7.5 percent and fixed asset investment which slowed 2 tenths to 5.5 percent growth.

One bank that was among the first this year to cut rates was the Reserve Bank of Australia which may be cutting some more based on increasing slack in the labor market. Up 1 tenth, Australia's unemployment rate rose to 5.3 percent for its highest level since August last year. Employment itself rose 34,700 in the month, down from 36,400 in July and centered entirely in a 50,200 rise in part-time employment that offset a 15,500 fall for full-time employment. The results may well reinforce the view of RBA officials that there remains significant spare capacity in the labour market and that the Australian economy can sustain a lower rate of unemployment without causing a spike in inflation. This assessment has been a significant factor driving the bank's decision in prior months to lower policy rates and it boosts the chances that further rate cuts will be considered in coming months.

We end the week's data run with a preview of sorts of next week's economic calendar which will be stacked with sentiment surveys. ZEW data out of Germany found analysts more pessimistic than ever about the current state of the economy but significantly less so with regard to the outlook. The current conditions gauge fell a further 6.4 points, its fourth straight decline and its eleventh drop in the last twelve months. At minus 19.9, the sub-index is some 92.5 points below its reading a year ago and at its lowest level since May 2010. By contrast, expectations as tracked in the graph improved markedly, posting a sizeable 21.6 point jump but still in negative ground at minus 22.5. And though this was the first increase in five months and the largest since December 2014, September's outcome was still among the weakest in more than seven years. In a word of warning, if the latest rebound reflected prior hopes for substantial ECB easing, then last week's less than convincing moves by the ECB might pave the way for a fresh slide next month. On balance the ZEW findings came in on the firm side of the market consensus but probably not to the extent that will calm rising concerns that the German economy could be in recession by the end of this quarter.

Markets: Brother, where can I find a dime?

The subterranean world of repo, where firms and banks temporarily exchange securities as collateral for cash, would seem a reasonable place to watch for early signs of systemic fissures. If nothing else the week's spike in repo rates, the result of a burst in demand for immediate funds that raised the cost of raising cash, questions the assumption that excess leverage is not a risk right now for the financial markets. Minimizing the significance of the event, Jerome Powell at his press conference voiced the accepted explanation that businesses were borrowing heavily ahead of quarterly tax payments, due at mid-month, and that bond buyers were borrowing to pay for Treasury settlements, also due at mid-month. To stabilize the repo market and bring down the cost of borrowing, the Fed injected emergency liquidity into the money markets during the week, offering firms and banks a willing buyer for their securities and a low cost source of cash.

Presumably with the tax and settlement crunch now behind us, this event will quickly fade out of memory. But if it reappears a couple of questions are bound to be revisited and with urgency. First, as played out in the cascading defaults of the 2008 crisis, whether counter-party risk has resurfaced and borrowers are over-extended; second, whether accelerating Treasury issuance (increasing the amount of Treasuries in the market) together with quantitative tightening (increasing the amount of Treasuries as well as mortgage-backed securities) have dried up available cash in the money markets. Powell did accept the possibility that reserves in the banking system may now be too low, a question that has been in the air all year and that he said the FOMC will focus on at their next meeting in late October. In the meantime, another spike in repo rates would rattle confidence hard and would raise suspicions and focus attention on the fundamental health of firms and banks as well as the financial system itself. As a final note, and only a temporary one pending repurchases, the Fed's balance sheet rose by $75 billion in the September 18 week due to the Treasuries and agency issues it purchased through repurchase agreements.

The bottom line

The latest week was not short of stresses and squeezes, whether in overnight funding or the inability of central banks to lift inflation. For the Swiss National Bank the greatest struggle is to keep a lid on their currency, part of the competitive devaluation subtext currently being played out between central banks, and one that may increase in intensity as rates move lower. At least the SNB, unlike other central banks, is a straight talker, saying with transparency that "the situation on the foreign exchange market is still fragile". But how much lower can rates go? Perhaps not much at all for banks like the SNB and BoJ where rates are already negative and perhaps not that much either for the Fed, at least if the hawks begin to rise in number. Jerome Powell definitely has his hands full, trying to find consensus within a Fed where a sizable minority are voicing resistance to further rate cuts at the same time that President Trump is loudly calling for exactly that, further rate cuts.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of September 23 to September 27

The week opens with a flurry of PMI flashes on Monday that will offer early assessments of September activity ranging from France and Germany to the United States. Continued weakness centered in manufacturing is the general consensus. Confidence surveys are also out in force including Ifo business and Gfk consumer data out of Germany, the business climate indicator out of France, as well as US consumer confidence and EC economic sentiment. The only central bank announcement is on Wednesday from the Reserve Bank of New Zealand which, at a policy rate of 1.00 percent, has already cut rates by 75 basis points this year including a 50-basis-point move at their August meeting. Inflation will be highlighted by preliminary September data from France and August PCE price data out of the US. The US will also post advance data on international trade as well as advance data on durable goods orders, the latter including details on core capital goods and the latest on business investment. If all the results go as planned, trouble in manufacturing tied to slowing global trade in tandem with subdued price pressures would confirm expectations for continued central bank stimulus.

French PMI Flash for September (Mon 03:15 EDT; Mon 07:15 GMT; Mon 09:15 CEST)

Consensus Forecast, Manufacturing: 50.0

Consensus Forecast, Services: 52.7

Consensus Forecast, Composite: 52.4

At a consensus 50.0 versus a final 51.1 in August, France's PMI manufacturing flash is not expected to hold safely above breakeven 50 in September. Yet new orders in August, driven by domestic demand, posted their best showing in nearly a year. The services flash in September is seen moving lower to 52.7 with the composite at 52.4.

German PMI Flash for September (Mon 03:30 EDT; Mon 07:30 GMT; Mon 09:30 CEST)

Consensus Forecast, Manufacturing:  44.5

Consensus Forecast, Services: 54.4

Consensus Forecast, Composite: 51.1

Weakness far under 50, Germany's PMI manufacturing sample has been confirming the slowdown underway in global growth and global trade. The flash index for September manufacturing is expected to come in at 44.5 versus an August final of 43.5 and an August flash of 43.6. Employment for this sample contracted at the fastest rate in seven years in the August report. German services, at an expected 54.4 for September's flash, have been performing much better than manufacturing though the sample's outlook is at a five-year low.

US PMI Flash for September (Mon 09:45 EDT; Mon 13:45 GMT)

Consensus Forecast, Manufacturing: 50.1

  Consensus Range: 50.0 to 51.3

Consensus Forecast, Services: 51.4

  Consensus Range: 50.5 to 51.5

Consensus Forecast, Composite: 51.2

  Consensus Range: 50.4 to 51.4

Stagnation for manufacturing and slowing growth for services has been the steady signal from the US PMIs. The consensus for September's flash PMI composite, at 51.2, is split between a services consensus at 51.4 and a manufacturing consensus at 50.1.

French Business Climate Indicator for August (Tue 02:45 EDT; Tue 06:45 GMT; Tue 08:45 CEST)

Consensus Forecast, Manufacturing: 101

Readings including order books moved slowly but in the right direction in August with expectations, however, for September's business climate indicator at 101 versus a slightly better-than-expected 102 in August.

German Ifo Economic Sentiment for September (Tue 04:00 EDT; Tue 08:00 GMT; Tue 10:00 CEST)

Consensus Forecast: 94.5

At a 7-year low, economic sentiment has been on a long decline and only slight improvement is expected for September, at a 94.5 consensus versus August's 94.3.

US Consumer Confidence Index for September (Tue 10:00 EDT; Tue 14:00 GMT)

Consensus Forecast: 133.6

Consensus Range: 132.0 to 137.5

The consumer confidence index rose sharply in July and unexpectedly held on to its gains during the trade tensions and market volatility of August. For September, Econoday's consensus is 133.6 versus August's 135.1.

Reserve Bank of New Zealand Announcement (Tue 20:00 EDT; Wed 02:00 GMT: Wed 14:00 NZT)

Consensus Forecast, Change: 0.0%

Consensus Forecast, Level: 1.00%

The Reserve Bank of New Zealand cut their policy rate by a sharper-than-expected 50 basis points at August's meeting citing a "softer" outlook for both employment and inflation. For this month's meeting no change is expected.

German GfK Consumer Climate for October (Thu 02:00 EDT; Thu 06:00 GMT; Thu 08:00 CEST)

Consensus Forecast: 9.7

No change is the call for October's Gfk reading which in September held steady at 9.7. Readings in this report indicate that household morale is at its lowest point in 3-1/2 years.

US International Trade In Goods for August (Thu 08:30 EDT; Thu 12:30 GMT)

Consensus Forecast, Month-to-Month Change: -$73.4 billion

Consensus Range: -$74.2 to -$71.1 billion

Forecasters see deepening for the August goods trade gap, at a consensus $73.4 billion versus $72.5 billion in July (revised from an initial $72.3 billion). Exports rose sharply in July while imports fell.

French CPI, Preliminary September (Fri 02:45 EDT; Fri 06:45 GMT; Fri 08:45 CEST)

Consensus Forecast, Month-to-Month Change: -0.3%

Consensus Forecast, Year-over-Year Change: 1.1%

The CPI for preliminary September is expected to fall a monthly 0.3 percent for a subdued year-on-year increase of 1.1 percent. This would compare with a monthly increase of 0.5 percent in August and a yearly rate of 1.0 percent.

Eurozone: EC Economic Sentiment for September (Fri 05:00 EDT; Fri 09:00 GMT; Fri 11:00 CEST)

Consensus Forecast, Economic Sentiment: 102.6

Boosted by improved morale in industry, the European Commission's economic sentiment index unexpectedly moved up from multi-year lows in August. Forecasters are looking for a decrease in September to 102.6 versus August's 103.1.

US Durable Goods Orders for August (Fri 08:30 EDT; Fri 12:30 GMT)

Consensus Forecast, Month-to-Month Change: -1.2%

Consensus Range: -2.3% to 1.0%

Durable Goods Orders, Ex-Transportation

Consensus Forecast: 0.2%

Consensus Range: -0.2% to 0.6%

Durable goods orders in August are expected to decrease 1.2 percent in what would mark an end to two prior months of strength that benefited from traction in both civilian aircraft and motor vehicles. Ex-transportation orders are expected to rise a modest 0.2 percent in August. Details on core capital goods, which bounced higher in July, will be watched closely in this report.

US Personal Income for August (Fri 08:30 EDT, Fri 12:30 GMT)

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.8%

Consumer Spending

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.4%

PCE Price Index, Month-to-Month Change

Consensus Forecast: 0.2%

Consensus Range: 0.1% to 0.3%

Core PCE Price Index, Month-to-Month Change

Consensus Forecast: 0.2%

Consensus Range: 0.1% to 0.2%

PCE Price Index, Year-over-Year Change

Consensus Forecast: 1.5%

Consensus Range: 1.4% to 1.6%

Core PCE Price Index, Year-over-Year Change

Consensus Forecast: 1.8%

Consensus Range: 1.7% to 1.8%

Consumer spending jumped sharply in July though income growth, held down by lower interest income, failed to keep pace. Price readings have been very subdued and only incremental pressure is expected for August, at 0.2 percent gains for both core PCE prices and overall PCE prices with year-on-year rates seen at 1.8 percent for the core and 1.5 percent overall. For consumer spending, a 0.3 percent increase is the call with income expected to rise 0.4 percent.