Fed to Hike Rates Despite Resilient Consumer Spending

The Federal Reserve is expected to raise interest rates by 25 basis points next week, bringing the federal funds rate target range to 3.75%, 4.00%. Consumer spending has remained resilient, with retail sales rebounding 0.7% in August, despite a drop in headline retail sales of 0.6% in July due to lower gasoline prices and a temporary pullback in nonstore retailers.

However, housing starts are under pressure due to elevated mortgage rates and affordability challenges, and the Bank of Japan is also expected to hike rates by 25 basis points next week. In emerging markets, India's CPI is expected to rise to 4.75% year-over-year, a bit softer than consensus.

The Federal Reserve meeting on Wednesday will be closely watched for signs of further rate hikes. With core PCE inflation running around 2.7-2.8%, and the three-month annualized rate picking up to 2.0%, it's likely that the Fed will hike rates next week, with a second rate hike in the coming months possible.

The Bank of England is expected to leave the Bank Rate unchanged at 3.75% next week, despite inflation rising to 3.2% and core to 2.7%. The recent labor market data suggest conditions are still soft, reinforcing the case for policymakers to look through commodity-driven price swings.