U.S. Inflation Data and Economic Growth the Fed’s Latest Test

Introduction:

The U.S. economy has returned to an easing cycle after a prolonged pause, as the Federal Reserve cut rates by 25 basis points in response to weaker labor market data, while inflation remains elevated. This week, all eyes turn to highly significant economic releases, led by U.S. inflation data—marking the first major test for the Fed’s policy trajectory.
In Europe, challenges persist as the German economy has slipped back into contraction amid concerns over euro strength, which weighs on exports and tourism. The broader Eurozone recovery remains sluggish compared to global peers. In Japan, the central bank kept rates unchanged, citing moderate economic recovery and weaker core inflation, signaling cautious stability in Asia’s second-largest economy.
Meanwhile, China continues to bolster confidence in its equity markets through proactive macroeconomic policies and tangible technological progress, underpinned by positive trade agreements with the U.S. and reinforced partnerships with Australia—though lingering industrial and trade headwinds may prompt additional stimulus measures.

Key Highlights:

•    Markets await U.S. inflation and GDP growth figures.
•    Sweden’s Riksbank and the Swiss National Bank meet to decide on interest rates.
•    The Bank of Japan continues to grapple with sticky inflation.

Financial Markets: U.S. Inflation and Economic Growth Take Center Stage

I. United States: US Core PCE & GDP

For the first time this year, the Federal Reserve resumed rate cuts after keeping policy unchanged across the previous five meetings. As widely expected, the Fed lowered rates by 25 basis points following weak labor market indicators, despite inflation holding above target.
Fed Chair Jerome Powell stressed the move was aimed at risk management rather than signaling a definitive pivot to a full easing cycle. He emphasized that future decisions will remain data-dependent, though he projected two more potential cuts before year-end.
Beyond monetary policy, markets closely followed high-level U.S. engagements:
•    Former President Trump’s visit to the U.K. yielded tech deals exceeding $40 billion.
•    A call with China’s President signaled progress on a TikTok agreement and paved the way for a bilateral meeting in South Korea within six months.
•    Reports also suggested potential breakthroughs in U.S.-India trade negotiations in the near term.
On trade policy, bipartisan legislation was introduced to exempt coffee imports from tariffs—a positive signal for Brazil, which supplies two-thirds of U.S. demand. Meanwhile, Trump announced a $100,000 surcharge on H-1B work visas, part of his broader agenda to protect the domestic labor market.
Recent economic releases highlighted mixed signals:
•    Retail sales climbed to a four-month high.
•    Industrial production fell on an annual basis.
•    Jobless claims dropped to a three-month low, though overall labor market conditions remain fragile.
This week’s focus is the Fed’s preferred inflation gauge, the Core US PCE Price Index, alongside U.S. GDP growth. Markets expect a monthly decline but a steady annual reading of 2.9%, which could be supportive for equities and gold.

II. Europe: Growth Challenges Amid the US Core PCE and GDP Outlook

Europe’s largest economy remains under pressure, with Germany sliding back into contraction despite ambitious fiscal pledges and investment plans.
Italian officials warned that euro strength is damaging EU exports and tourism revenues. Former ECB President Mario Draghi echoed concerns, noting that Europe still lags behind global competitors due to insufficient structural reform and weak momentum.

III. Japan: Policy Steady, Inflation Moderates

The Bank of Japan kept its policy rate unchanged last week, while announcing sales of billions in ETF holdings to reduce its balance sheet.
Governor Kazuo Ueda described the recovery as “moderate but uneven”, with downside risks from protectionist trade measures.
Ahead of the meeting, data showed Japan’s core inflation easing to 2.7% in August, a nine-month low, though still above the BoJ’s 2% target—reinforcing the decision to maintain current policy settings.

IV. China: Investor Confidence Strengthens Amid the US Inflation Data 

Global investor sentiment toward Chinese equities continues to improve, driven by proactive macro policies, rapid technological advancement, and positive trade signals with the U.S.
China also deepened trade ties with Australia—particularly critical in raw materials such as iron ore.
Despite resilient stock market performance, recent data revealed weaker industrial production and retail sales, underscoring persistent challenges in the real economy. These headwinds may push Beijing to adopt bolder stimulus measures in the coming period.
 

Economic Calendar following US PCE Inflation Data

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