HEW: October’s Wave of Easing

• US inflation joined the punchy payrolls release in exceeding expectations, defying the dovish bias. The RBNZ followed the Fed’s 50bp, and Korea started cutting, but Peru hawkishly surprised with rates on hold. The early-easers are having second thoughts.
• Next week’s policy focus is the ECB, which we expect to cut amid a dis-inflated outlook and disappointing demand. The market and consensus agree although it is not inevitable. UK inflation data are set to slow while the labour market remains tight.

Excessively dovish expectations have kept repricing recently, but 2025 rates still haven’t reversed the dysfunctional drop from August’s VAR shock. The market moves since we highlighted that again in our monthly (see HEM: Sugar Rush ) and market update (see Terminal Rates Are Still Too Low ) have lifted pricing for end-2025 by almost 10bps, but there is still space for this trend to extend. August’s depression still hasn’t unwound in 2025 rates despite other assets long since recovering.

Rate alignment across the US, UK, and EA limits FX opportunities. Our previous contrarian views on USD strength no longer hold amid narrowing central bank policy differences that have already lifted the dollar. Meanwhile, the equity outlook remains bullish, supported by monetary easing. Like in 1998, shallower rate cuts would eventually become bearish, but that can be managed with opportunistic hedging through options rather than disinvesting.

Another sign of hawkish resilience came with US CPI inflation’s upside surprise, which followed similar news on the US labour market. It defied dis-inflated expectations despite sharp falls in energy prices. Core strength was more pronounced and not reliant on shelter price inflation, which it exceeded by the most since Feb-22. Nor does strength reflect residual seasonality. Repeating 2022-23’s pattern would mean a softer Q4, helping the Fed to cut again in November and December before more robust numbers in Q1 start urging restraint (see US CPI Extends Hawkish Narrative ).

Peru may be another canary in the coal mine of excessively loosening global policy as it announced a surprise hold. Regional peers started easing much earlier than the rest of the world, with Brazil already returning to hike rates. It’s too early to say Peru will do the same, as it has paused and resumed before, and guidance is open. The expected cuts still came elsewhere, with the RBNZ hacking by 50bp and Korea by 25bp.

Next week’s monetary policy focus is naturally the ECB, although decisions are also scheduled from the Philippines, Thailand, Indonesia and Chile. Depressing news in demand surveys raised market pricing for a cut, which hasn’t faced much resistance from policymakers. Realising a downside surprise in the latest flash inflation data compounds the dovish pressure despite it merely matching our forecast. With the rebound looking increasingly minor and temporary ahead of a below-target 2025, we expect the ECB to cut rates again at its 17 October meeting.

There are three more weeks after that until the BoE’s 7 November decision, which is even more likely to yield a 25bp cut. Nonetheless, next week’s UK labour market and inflation data are necessary signals about the broader policy outlook. As in the Euro area, UK inflation will likely significantly slow in September, reaching 1.9% in our CPI forecast.

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