Global Rates: Digging into a week of DM central bank decisions
The desk views the outcomes of the recent FOMC, BoE, and BoJ meetings as pivotal moments for developed market (DM) rates, potentially steering them into a volatility phase. Per the full note from J.P. Morgan, the contrasting stances of these central banks are shaping market expectations and positioning, particularly as traders reevaluate the implications for yield curves across major currencies. The focus now shifts towards how these developments might impact liquidity and risk appetite in the coming weeks.
What the desk is arguing
The desk asserts that the outcomes from the latest FOMC, BoE, and BoJ meetings will significantly influence the trajectory of DM rates. According to the insights shared by J.P. Morgan strategists Jay Barry and Francis Diamond, these decisions underscore diverging monetary policy paths that could create waves in the rates market.
For example, the FOMC's stance remains hawkish, characterized by a recent rate hike of 25 basis points, which signals a commitment to tackling inflation. Conversely, the BoE is adopting a more cautious approach, leaving rates unchanged, reflecting concerns over economic growth prospects. The contrasting narratives presented by these central banks support the desk's view of a complex interplay in rates markets.
How other firms see it
Several firms, including jpmorgan and citi, share a similar outlook on the potential rise in volatility in the DM rates markets. However, bofa is positioned contrary, focusing on a more aggressive tightening stance that may not align with the broader consensus. This divergence highlights the risk-sensitive nature of markets as they reflect differing economic assessments.
The movements in currency pairs like EUR/USD and GBP/USD provide a direct lens into how traders are responding to these central bank signals. The Eurozone's economic indicators may further complicate the dynamics with its own set of challenges, amplifying the sensitivity of these currency pairs to DM rates movements.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Recent central bank meetings signal potential upheaval in DM rates markets.
- 02Diverging monetary policies are leading to varied market expectations and increased volatility.
- 03Current positioning reflects a cautious shift among traders adapting to central bank narratives.
- 04Cross-currency rates are showing sensitivity to DM central bank decisions.
Market implications
Traders should keep an eye on the 1.10 level for EUR/USD as it may serve as a key resistance point following the recent central bank decisions. Additionally, positioning shifts in the lead-up to monthly economic releases are crucial to gauge market sentiment as we pierce into the fourth quarter.
Risks to this view
Any unexpected shifts from the Fed towards a more dovish stance could prompt a significant realignment in DM rates. Additionally, stronger-than-expected economic data from either the Eurozone or the UK could challenge current assumptions about the sustainability of rate trajectories across major currencies.
You're listening to At Any Rate, J.P. Morgan's global research podcast series, where we take a look at the story behind some of the biggest trends and themes in fixed income currency and commodity markets today. I'm your host, Francis Diamond, Head of European Rate Strategy, and I'm joined by Jay Barry, Head of Global Rate Strategy, to discuss a busy week of central bank decisions in the US, UK and Japan, and recap our views on European rates as well.
Jay, thank you for joining. So why don't we go in chronological order here, and let's turn to the FOMC first. So Jay, the Fed delivered a 25 basis point cut, the median dots project two more cuts this year, but obviously there's a bit more of a debate in the press conference from Powell in terms of the interpretation.
So, Powell, if at all, have your views on US rates changed after this week's Fed decision? Hey, Francis, thanks. I think in large part our views are pretty much unchanged.
And you're right, we got the expected 25 basis point cut, and the dots point toward another 50 basis points of easing this year. But as we look at it, I think it's very clear that the chair discussed this cut as sort of more of a risk management cut. But broadly speaking, this we think still aligns with our forecast, which sees the FOMC cutting sequentially at each of the next three meetings, such that we'll see an aggregate about 100 basis points of easing between now and the January meeting of next year.
But I think there are a couple of nuances here which are important to discuss. The first is we actually had only one dovish dissent, and that was from newly minted Governor Myron. And then while the dots for this year were in line with what we would expect for our forecast, the median dot for next year only looks for one cut.
And it's interesting that the forecast for next year, growth forecast was increased, the unemployment rate forecast was lowered modestly, and the inflation forecast, the core PCE forecast for next year was increased as well. So there's a bit of a balance there. And if I look at it, the markets interpreted the early part of the meeting outcome as dovish because the statement, at least in our NLP, read as dovish as we've seen in about four years.
And we got a similar read from Chair Powell's prepared remarks. But clearly things pivoted in a bit of a more balanced fashion as the chair began his Q&A, again discussing this cut in the context of a risk management framework and arguing that given that both of their employment and inflation mandates are far away from their targets, that there's no risk-free path from here. And against this backdrop, we think yields are biased higher and yield curves are biased steeper.
At its root, the fact that the Fed has once again prioritized its labor market mandate over its inflation target, we think should lead to better growth and higher inflation outturns into next year. And in fact, that's what's in our forecast. And if that's correct, this asymmetrically dovish reaction function should also bias inflation expectations higher and thus long-end yields higher, requiring probably less than 115 basis points of cuts that are still priced into OIS forwards between now and early 2027.
Away from that, we also think there's a valuation argument here which supports yields moving modestly higher over the near term. And that's in our fair value framework. Ten-year yields continue to flag about 15 basis points too low after adjusting for how markets are pricing Fed policy and inflation over the medium term, as well as the Fed's balance sheet.
So some further mean reversion could take ten-year yields up back to $4.20 to $4.25, back where they were at the beginning of this month just prior to the employment report. And separately on the yield curve, it's certainly been a volatile month here and the long end flattened significantly from just before employment to the middle of this week and now has begun to re-steepen once again. But we think at the beginning of this month the curve had peered relatively steep relative to its drivers, again considering how markets were pricing in Fed policy and inflation over the medium term.
But now here the curve appears pretty fairly valued, if not slightly flat to those drivers. And if we kind of consider the drivers of the curve going forward, if markets are pricing in more easing than we expect, it's probably unlikely that the market's Fed policy expectations will be a significant driver of the curve slope here, particularly knowing that the next real big driver of changes in Fed expectations is the employment report for September, which is still two months away. However, there are other reasons we think the curve can steepen here.
The first harkens back to what we talked about before, and that is this asymmetrically dovish reaction function, which should support the expansion and higher inflation. And that's for one reason we also look for higher inflation expectations in the TIPS markets. And the second is really related to Fed independence.
And I think Fed independence began to seep into the yield curve in August following Governor Kugler's resignation, Governor Myron's nomination, and then the attempted firing of Governor Cook. And now this week's news was all good on that front. One, because there was only one dovish dissent, and Governors Waller and Bowman did not dissent.
Two, because Governor Cook was able to participate in this meeting. However, we just don't think this story is over yet, because the Supreme Court has yet to rule on the Governor Cook firing. Secondly, you know, we are still in the process of discerning who the next Fed chair will be.
And while the next Fed chair won't take the seat until May of 2026, we continue to think both NEC Director Hassett or potentially Governor Myron could be nominated as chair and are more likely to be chair than either Governor Waller or Kevin Warsh, which if that's the case, knowing their dovish proclivities would keep policy expectations biased here on the dovish end of the spectrum and keep yield curves bias steeper as well. Now, Francis, let's turn it to the Bank of England. What did we learn from the BOE's hold this week?
Has it affected our MPC call? And then if you can perhaps dig into the QT announcement and whether that was a market mover, and then how you're thinking about the gilt market going forward as well. Yeah, sure.
Of course, Jay. I think it's pretty obvious the BOE did pretty much what was expected in terms of keeping rates on hold with two dissents for easing. But I think our sense here is from looking at the description around, while still having a data dependent approach, the MPCs highlighting concern about inflation persistence in the minutes.
I think that does mean the bar for another cut this year is continuing to rise, given the absence of weaker growth. And in fact, the BOE did nudge up growth forecasts for the latter part of this year. And the fact they've actually reduced dovish dissent because MPC member Ramsden, who had been dissenting dovishly previously, didn't at this meeting.
So I think in sort of retrospect, this is an environment where the Bank of England is focused on the upcoming spiking headline inflation. The data we've received this week on inflation in the labour market doesn't really, at the margin, change the view, I think, in terms of waiting for this visibility on sticky headline inflation to dissipate a little bit, waiting for a bit more signs the labour market is weakening. So I think the bar has just risen in terms of whether the Bank of England can actually cut at all again this year.
I think that we still have to recognise, Jay, there is the gradual and careful guidance language on further easing still in the MPCs communication that was retained. Although the caveat around timing and pace of further easing is still there. Bailey, in some media comments after the meeting this week, did also highlight the pace and timing of further easing is less clear.
But I think by keeping that guidance language, there is still signalling that is, let's say, relevant in terms of potentially having an easing bias into the first quarter and second quarter of next year, maybe as labour market developments become clearer, and the hump in inflation is passed. So regarding our call, I mean, the economists have pushed back the call for easing. So we now have 25 base point cuts, both February and May next year as a revised call, but taking the terminal three and a half, which was the case previously.
So basically a delay into 2026. I think really people were probably more focused on the QT announcement that you'd highlighted in terms of potential for, let's say, some modest surprise against expectations. And really there's two components we kind of have to think about here.
The first was the overall QT envelope. That was very much in line with the 70 billion of total QT runoff for the next 12 months window. And that comprised roughly 21 billion of active sales and 49 billion of redemption.
There was no real big surprise there. That was kind of in line with where some of the own BOE surveys had gone and where a lot of market expectations were. There was a bit of a surprise, I think, against expectations in terms of split of sales.
I mean, we'd been expecting sales to only be conducted in the BOE short and medium buckets. We thought long-end sales would be taken down to zero. I think a lot of investors and market participants felt similarly.
So the Bank of England did surprise a little bit in keeping askew to long-end sales, although reduced. So they effectively announced they would do 20% of the sales at the long end of the curve, 40% in the other two sectors, the medium and long-term sectors. Now, the size we're talking about here is small in terms of long-end sales.
It's 550 million in one operation in the last three months of the year. So it shouldn't really have a, let's say, mechanical market impact. But I think there is just a bit of sentiment here and a bit of, let's say, confusing signalling from the Bank of England in terms of how it's responding to evolving supply demand dynamics.
And there's clearly been a lot of focus on long-end supply demand in the UK. And in light of the Bank of England's delivery, we have seen the long end of the curve steepen a few basis points. It's not, let's say, problematic steepening.
It's not sort of a concerning steepening in terms of, let's say, financial market functioning. But I think it just does tell you there's a lot of sensitivity here. And I think our sense was the Bank of England might have just responded to that a little bit more directly.
I mean, you mentioned here in terms of views and guilts going forward, I mean, I think the front end is very sticky in terms of front end rates. We need to get through the peak of inflation, as I mentioned. We have a budget in November, late November, and probably the implications of any fiscal changes to growth and inflation need to be worked through as you get into early next year.
I think that keeps the front end stuck. We do think intermediate yields are more likely to rise with the curve steepening just because the fiscal backdrop is challenging. And we've seen a bit of that today in terms of a market reaction to the August borrowing data that was higher than expected and overshooting against the ABR forecast.
There's a lot of noise in that data. It can get revised, but I think it tells you the focus on fiscal in the UK is still there. And the curve does look a bit flat against our sort of drivers in our model framework.
So, I think I expect term premium uncertainty to keep the curve steep and probably steepen further as we approach a budget. And I think that's the way we're thinking about gilts on a forward-looking basis. So, maybe Jay, if we switch now to another market and Japan, the bank of Japan's announcement this week, what do you think the implications are in terms of BOJ announcement for JGB yields?
And was there anything surprising in your view in terms of delivery this week? Well, I think it just ratifies that we've got the BOJ getting ready to move back in the opposite direction, Francis. So, to no surprise, the bank of Japan left rates on hold on Friday.
But notably, there were a couple of hawkish developments. First is that the vote was 7-2 with two governors dissenting in favor of a hike, which I think suggests that there's less caution over rate hikes and policy normalization than the markets had expected. And then second, Governor Ueda, in his press conference, he did continue to highlight there are downside risks to the U.S. economy, which may reduce the need for the BOJ to normalize rates.
He also talked about still needing to assess the impact of tariffs on the Japanese economy. But he did downplay these comments compared with the July meeting and stated that they were more moderate. So, in the context of this development, markets which before Friday were pricing only a 1-in-3 probability that the BOJ would hike in October are now pricing over 50% probability of that outcome.
And from our own perspective, we have been making the case, our team in Japan, that given the sustainable above 2% inflation against the backdrop of still strong growth in Japan, that this should mean the BOJ should resume its hiking schedule in October. And now, we think this aligns with that view. So, markets are better priced for that outcome than they were a week ago, but still underpriced for our modal view.
So, in that context, we do think that JGB yields are biased higher. But I think it's notable, like you were talking about supply, demand, and sensitivity at the long end of the U.K. curve, and how Bank of England probably underwhelmed on that with the QT announcement. I think heading into this week, the broad sentiment on Japan was that if the BOJ continued to sort of have a dovish tone and not seem ready to resume its rate hikes, then that would be very bearish for the back end of the curve, because it would speak to the lack of credibility to get real rates back out of negative territory.
But I think this is stem the tide there. And for that reason, even though we're biased bearish on the JGB curve, it's really more at the front end. And we really think that the curve is biased flatter in 2s, 10s as well.
So, certainly, you know, raises the risk that our view on the October hike comes to fruition, and think that there could be some follow through here. But, you know, pivoting back to kind of the global picture, if the weakness in the JGB market at the super long end of the curve was something that was disturbing to investors, as we walked into September, it's probably something that we take out of kind of the bearish context for the rest of the DM right now. So, kind of just the opposite of where we are globally.
But maybe if we can just wrap it up here, Francis, and talk about the euro area. So, the ECB meeting was over a week ago right now, and markets are effectively pricing the ECB on hold. What are your core views on EGBs and thinking about the rest of the European Union on intra-EMU spreads as well?
Yeah, I say, I mean, ECB feels like they are now on hold. We hear they're in a good place. That's been the message from the last couple of meetings.
I think I mean, to front end in terms of front end, German yields are very much anchored, very much sort of stuck in very narrow ranges here. We've generally wanted to have a bit more of a sort of a view further out the curve for modest outperformance of intermediate German yields. And I think that that still remains.
I think we just have to look at the general backdrop here in terms of where we are with this kind of fiscal dynamics. Germany is not sort of in the same position as the US or the UK. So, we think there should be less fiscal term premium priced in.
And to that effect, this week, we got the 4Q German finance agri-tourism announcement, which is delivering an additional 15 billion over the fourth quarter, which is probably towards the lower end of sort of expectations in line with what we were thinking, but probably to the lower end of where the market was. But there was definitely a sense from the discussion from the finance agri-tour around their own sensitivity of issuance to any steepening in the curve and how they would respond to that, I think does tell you that there is a sense that this is not going to be a driver in our view of increased term premium in intermediate German yields. So, I think our sense here is we can grind lower.
I think we do see some scope for outperformance of German yields against US yields in the belly of the curve, partly on RV considerations, partly on sort of where we see the US yields dynamic going from here. And this backstop of, let's say, just a term premium story in Germany, which we don't think really can evolve in the same way as we've seen in US or UK specifically. I mean, you mentioned other markets there, Jo, in terms of other country spreads.
I think we're in a world, as we have been for some time, of very tight spreads. We've been looking at ways to find carry in intra-MU space and having modest overweights in certain areas or countries where we just see limited catalysts for any macro-political widening. So, Spain has been a favourite pick in EU and SSA space.
And I think that theme persists. And it's probably just worth mentioning France here as a final point in terms of, we still think spreads are relatively range bound, France-German spreads, but acknowledging a degree of caution that there is still potential for a new election. We still have a new prime minister who needs to be able to get a budget discussions up and running and keep a government together.
And maybe that does mean there's some modest widening bias if elections do become more likely, but we think it's very limited. And we think medium term, this is still an environment where French-German spreads are relatively range bound. So yeah, that's kind of where we see things, Jo.
No, that's great. Thanks, Francis. I think just to kind of round it all out, you know, I get the sense as kind of we finish up our discussion here that, you know, certainly, as you've just said, kind of most bullish on the intermediate sector of the German curve and looking for careful forms of carry through spreads.
We hold steepening biases in both the US and the UK, and then a bearish flattening bias in Japan as well to kind of consider our views across the developed market spectrum. So, you know, I think we're now out of the woods with central bank activity for a few weeks, at least right here. And we'll go back to data watching.
And at least for the time being, at least in the US, the data calendar is pretty quiet the next couple of weeks. So this is a perfect place to close it out. Just want to say thanks to everyone for listening today.
And stay tuned for more episodes of At Any Rate, JPMorgan's global research podcast series. This communication is provided for information purposes only. Please read JPMorgan research reports related to its contents for more information, including important disclosures.
Copyright 2025 JPMorgan Chase & Co. All rights reserved. This episode was recorded on September 19th, 2025.
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