Global Rates & FX Views: NFP, midterm, & refunding recap
The desk is asserting a nuanced outlook on the FX landscape following the recent payroll report and midterm elections, emphasizing potential implications for US growth, inflation, and Fed policy. Per the full note from Bank of America, the commentary highlights the adjustments in rate expectations stemming from these economic indicators. With the current EUR/USD spot at 1.1373, consensus targets for March 2026 range from 1.1162 to 1.2000, reflecting mixed sentiment in the market. As traders navigate these developments, they should remain alert to the Fed's next moves as well as broader macroeconomic trends.
What the desk is arguing
The desk frames the current market narrative as one deeply influenced by recent economic reports, particularly the Non-Farm Payrolls and the implications of the midterm elections. Per Bank of America's analysis, these events are expected to shape both growth and inflation outlooks, leading traders to reassess their positioning ahead of future Fed decisions.
Moreover, recent reactions to data releases indicate a potential shift in rate projections, where robust job data could necessitate a more hawkish stance from the Fed. The current payroll report now suggests that inflation pressures might persist, influencing the long-term trajectory of both the USD and related currency pairs like EUR/USD and GBP/USD.
Where it sits in our coverage
For the EUR/USD pair, our internal consensus target is set at 1.1425, with forecasts varying between 1.1162 and 1.2000 from multiple firms. Notable targets for December 2026 include: - bofa: 1.1500 - rbc: 1.2000 - hsbc: 1.1000
This perspective is positioned lower compared to the cross-firm consensus. The bofa target aligns closely with the current quotes, situating the desk’s viewpoint toward the more cautious end of the broader market spectrum.
How other firms see it
Firms such as rbc and mizuho are maintaining more optimistic forecasts for the EUR/USD, promoting targets in the range of 1.1600 to 1.2000. In contrast, hsbc and nomura project a moderate path, advocating for more restrained targets in the vicinity of the current spot price.
In addition, the trajectory of the GBP/USD is inherently linked to the anticipated actions of the BoE, with interest rate shifts likely affecting both pairs in tandem.
How firms align with this view
consensus1.1425range1.1162–1.2000
Key takeaways
01Non-Farm Payrolls and US midterm results are reshaping inflation and growth assessments.
02Current FX pairs, particularly EUR/USD and GBP/USD, are influenced by shifting Fed policy implications.
03The desk’s forecast is among the more cautious within a broadly mixed market outlook.
04Expect potential volatility as markets adjust to incoming data and central bank communications.
Market implications
Watch the EUR/USD pair closely as it interacts with trend indicators and upcoming central bank guidance. Key triggers may arise from shifts in labor market reports or inflation data that diverge from current consensus expectations.
Risks to this view
Any significant miss in forthcoming economic data, particularly a weaker-than-expected payroll figure, could lead to a rapid reassessment of current forecasts, prompting traders to re-evaluate their long positions across USD-related pairs.
Hello and welcome to Global Research Unlocked, the interest rate in FX series. This podcast is based on our weekly client conference call, where our strategists, along with guests from other parts of Bank of America Global Research, discuss the most topical and pressing questions faced by our market. I'm Mark Cabana, head of US rates strategy at B of A Securities.
Happy Friday, everybody. What a week. We're going to do our best to recap everything that has happened in the last week and then talk about what it means for the markets.
With me on the call today, I have our Chief US Economist, Aditya Bhave, Senior US Economist, Stephen Juneau, and Rate Strategist, Katie Craig, with me. As I'm sure everyone is aware, it has been quite a week. The equity markets have been very much roiled over the last week or so.
The NASDAQ is down about 7% with a really sharp drop yesterday. We've also seen a very sharp drop in oil that has contributed to rates moving lower across the curve, though there was quite a bounce higher in rates today after the stronger than expected employment report. Let's unpack all of this.
To do that, Aditya, let's start with you. What did you take from the labor data this morning? Thanks, Mark.
Good morning, everyone. This was an unambiguously hawkish jobs report. Jobs come in more than double of consensus at $165,000, importantly also with upward revisions to the prior two months.
What looked like a rather weak September number now looks very trend-like. The three-month average is at $137,000, which is well above, I think, where anyone thinks the break-even rate is. Wage inflation picked up on top of upward revisions to the previous month.
The unemployment rate rounded down to 4.1%, although on an unrounded basis it was basically unchanged. It fell a couple basis points. Still, that's impressive in the context of an increase in the labor force participation rate.
Typically, when participation increases, unemployment rises, and then we say, okay, well, that was an increase for good reasons. When both happens, lower unemployment and higher participation, then that looks really quite strong. You put everything together, it's a strong jobs report.
There's no question about it. Great. Thanks, Aditya.
Stephen, and we're going to come back to you, Aditya, to talk about what this all means for the Fed, but Stephen, why don't we transition to you now? Give us your quick take on the election, what you think it means, and especially what you think it means for the all-important CapEx boom and data centers specifically. Yeah, thanks, Mark.
It was definitely an outperformance of many expectations, including our own, for how the Democrats came out. They won basically every major race. They won more seats than many expected in the Senate.
They're going to have a huge majority in the House. They won key races at the governor level, and gubernatorial races in Texas, Ohio, Georgia, where a lot of data centers are concentrated. Obviously, the concern of markets is that the Democratic sweep will lead to, and the Democratic performance really broadly in the election, will lead to increased regulation.
I think that's probably right in terms of the risk space, but we still don't think you're really going to see anything materialized at the federal level, so it's still going to be state and local measures adopted, and we don't think it will really affect things that are already under construction, and that's more than double what we already have in place. In terms of the economic impact and the CapEx impulse to growth coming from data center build-out, we think it's still there next year, still probably there somewhat in 2028, and the bigger risk for that, in terms of the planned data center capacity, is really about questions around monetization, questions around demand, but for the time being, revenue growth of cloud revenue is growing rapidly, as our equity analysts have noted. You're seeing adoption of AI also increase rapidly, with a lot of scope for further diffusion, so I think that the demand still justifies the build-out, and the regulation may drive up the cost, it may lead to some more delays, it may lead to relocations to other states that are more favorable than states that are putting in more restrictions, but it probably doesn't stop the build-out altogether.
Thanks. So for either Aditya or Stephen, it sounds like the risks to growth have shifted, but if I'm reading in between the lines here, it sounds like you're not compelled or feeling compelled to actually make any changes to your GDP projections as a result of the election outcome. Is that a fair interpretation?
Yes, it is. We think that any potential changes, as Stephen said, would be kind of a bit further down the line, and it's hard to have strong conviction on what's in store for us in the second half of next year, let alone 2028, just because so much can change. From our perspective, obviously we have forecasts going out to 2028, we're much more focused on the next couple quarters, and we really don't see any reason right now to change our forecasts.
Thank you. Another area of very relevant forecasts for markets is on the Fed. So Aditya, when you take into account everything that we have learned from the election, from payrolls, from other data, from the big move in equities, how do you think that influences the risks around your base case Fed outlook, which is for two more hikes, one in Dease, one in SEP, and then the Fed being done?
Right. So our base case remains the same. They go once again in December, and then once again in March next year.
The risks to that, I would say, are slightly skewed to the upside. I mean, I can see both scenarios, but the upside argument would be, look, if you get into early next year and you again get the seasonal pickup in inflation because of price resets, particularly in goods, being larger than what the seasonal factors are accounting for, and this has been a story for the last several years. I think the last couple of years they said, okay, but that's tariffs, that's going to roll off.
Well, this year it's harder to argue that it's just tariffs, right, and the Dease will pass through, the Fed has said, is something that they're a lot more concerned about than tariffs. So if you do get that stickiness, I think their views on underlying inflation are going to have to get marked up, and that could mean more hikes in June or September, maybe next year. There is a scenario in which there's a big roll-off in year-over-year inflation early next year.
There's going to be six consecutive months where Core PC had annualized 3% that was decent last year to May of this year that are basically rolling off the year-over-year rate. So there is a chance there where the opposite happens, you get a big drop, and then the psychology around inflation changes, and the Fed ends up skipping the March hike. But if I had to pick which way the risks are skewed, I would say the risks are probably slightly skewed towards more rather than less compared to our base case of two more hikes.
In terms of today's jobs report and how that affects our outlook, what I would say is there is a Fed put for the equity market, we know that. We would like to think that the Fed isn't just going to panic based on a one-day sell-off. Yes, it was huge yesterday, but we would like to think that the Fed put is still out of the money, and today's jobs report probably pushes it further out of the money.
That's how we would think of the impact, because it is a very hawkish jobs report, but it is on the side of the mandate that the Fed is much less focused on. They're probably putting 10%, 20% weight on the jobs report, and they look at this and they say, okay, this vindicates our view that the labor market is not a source of concern. Back to regular programming, focus on inflation, and I think next week's CPI report is going to be much more impactful for Fed pricing than today's jobs report.
Thank you. Stephen, maybe just jumping back to you off of that, CPI next week. How is your forecast, and how are you thinking about the risks around that?
Great question, Mark. We're forecasting roughly 0.2 for headline, 0.2 for core. We won't get, as you might remember, we won't get year-over-year because last year we didn't get the October data due to the government shutdown at the time, so there won't be a comparable index to compare year-over-year against.
But we're looking for something a little bit softer than the last two months, not really for any particular reason, just kind of a cool-down relative to what we've seen previously, returning to kind of more trend-like measures we had been seeing previously. That said, I mean, given that we saw two beats over the last two months, if we're thinking about the upside risk, I guess I would lean in the direction of this coming in a little bit firmer than what we're anticipating. So could you see a 0.3 on core?
Absolutely. That, of course, would help Aditya and our call, help our call for the Fed to hike in December and then again in March. Great.
Thank you. All right. So we've covered the macro data.
We've covered the election. Now let's talk about markets. Let's talk specifically about U.S. rates.
Katie, transitioning to you, what does all of this mean for the U.S. rates outlook? Yes. Thank you, Mark.
So I would say just taking a step back and looking at the moves we saw over the past week, I would say we saw what appeared to be a delayed market response to the midterm results yesterday when the market moved very firmly risk-off. We saw Treasuries rally alongside a drop in oil, which I would say that drop in oil was likely driven by speculation that the Democratic sweep would result in a de-escalation around Iran. Additionally, this move in rates coincided with a sharp sell-off in equities, which was led by tech, and that appeared to be driven by expectations for greater regulatory scrutiny around AI.
So the rally in rates yesterday really challenged our underweight duration views, especially at the front end. But we still believe that strong economic data, such as what we saw today, will continue to put the pressure on the Fed to hike. Overall, I would say we maintain our bias to be underweight at the front end, and we still like curve flatteners, but the recent equity moves and the risks of higher regulation just reduce that conviction.
But still, judging from today's labor market data and the strength in our consumer data, it will still likely take a more significant tightening in financial conditions to really slow inflation. So again, we still maintain that core view of being paid the front end. Thanks, Katie.
Certainly, we've been getting a lot of questions about that view, about our conviction in that view. And the only other thing I would add, and what I've been trying to encourage clients to do, is just make sure you take stock of what the market is telling us right now. And I think the market is telling us three key things.
First, the market is telling us, and consensus is that there will be de-escalation in Iran. Second, I think the market is pricing that current growth is about as good as it's going to get in the U.S., and it's only going to slow down from here. And third, I think the market is telling us that there's really very little capacity for the Fed or any other central bank to hike more than is currently priced.
And if you agree with that, I would just ask you to judge for yourselves, how do you assess those balance of risks? Do you think that escalation is much more likely in Iran? Do you think that growth is just on a one-way direction, slower and weaker from here?
And do you think that there's no more capacity for central banks to be pricing in a hawkish stance? You heard at DTA's assessment of the balance of risks. We judge that the risks are not in line with consensus, but I would encourage our clients to try and answer that question for themselves.
And hopefully that is a helpful way to approach where rates go from here. Okay. Thank you, Katie.
Katie, turning to the other big U.S. rates market event this week, the quarterly Treasury refunding, what did you really take from that? And what are the key messages that you've been trying to share with clients about that? Yes.
So the quarterly refunding announcement this week was largely in line, I would say, with our expectations that they would maintain coupon auction sizes at this refunding, despite the fact that there was a lot of chatter going into this refunding, that they may cut long end auction sizes. They did, however, adjust their forward guidance much more modestly than I was expecting going into this refunding, especially considering the speculation around cuts to the long end. So what they did was they've been saying for the last few quarters that they would maintain auction sizes for at least the next several quarters.
They removed the words at least, which to me means they will maintain auction sizes for the next three to five quarters, which means, again, I would translate that to mean that the soonest they're likely going to grow or cut auction sizes is going to be the August refunding. Now, the other thing that I would say around this is that the Treasury didn't highlight the upcoming debt limit risk. Currently, we are around $550 billion or so below the debt ceiling.
And considering Treasury's elevated, higher than expected, markable borrowing forecasts and TGA forecast for next quarter, it actually pulls forward our expectations for when Treasury will become bound by the debt limit to February of next year. So if that's the case, the debt limit could become binding in February. And based on our expectations for the TGA and extraordinary measures, they could be at the debt limit through November of next year.
However, I would also highlight that they become uncomfortably close to running out of their cash balance and out of their extraordinary measures in August. So I do think when Treasury does ultimately guide around their debt limit timing, that they will focus on August in order to avoid getting so uncomfortably close to those thresholds. So all in all, I would say that the small adjustment and forward guidance plus the debt limit risk leads us to revise our expectations for auction size increases from the August refunding meeting to now the November refunding meeting.
And we've also revised our numbers, our growth in auction sizes from the two to seven-year tenors to now the two to 10-year tenors based on the TBAC recommendations. However, we will, in our forecast, we do concentrate most of that growth in auction sizes in the two to five-year buckets, considering our views on optimal debt issuance and where we think Treasury is more likely to want to grow issuance based on demand for specific tenors. Thank you.
I did get a question over Bloomberg. It was asking about where we see those three consensus views in markets that I highlighted earlier. Recall, those three consensus views, in our opinion, are first, in the expectation of Iran de-escalating.
You see that very clearly in oil. Second, it's the notion that global growth, or at least U.S. growth, is at its peak and will likely slow. I think you very clearly see that in the NASDAQ.
I will tell you that I've heard from multiple people that, well, given the election results, U.S. growth is now as good as it's going to get. And I've also heard the view that the fundamental data that we look at, like employment, like inflation, like consumer spending or consumer confidence, is irrelevant right now because you just need to be focused on the future and how much less capex you're going to get as a result of the NASDAQ view. That sentiment is very strong, at least in my head or from what I hear, and I think that the NASDAQ is the best embodiment of that.
And then the third consensus view is that the central bank cycle is essentially perfectly priced. And what I would encourage folks to look at to see evidence of that is where the Fed is expected to be one year forward, 50 basis points priced. If you look at Bloomberg consensus, it is very much centered on the Fed only delivering 50 more.
And that, I think, is also reasonably true for other global central banks. In Canada, you're also pricing about 50. In the euro area, you're also pricing about 50.
In the UK, you're pricing a little bit more, but it's close to that. It's 65, 70, let's say. So in my view, there's a lot of consensus around what central banks will do.
And that's very, I think, strong in the US. And it's worth asking yourself, where do you see the balance of risks around that? So to me, those three consensus views are quite clear.
And I think there's a lot of evidence in markets to support that take. You know, the final point I would like to make, and we were flagging this in our Global Rates Weekly. I like the title.
We called it Red Wiped and Blue. Get it? But the other point I would make is just that there is a clear theme, at least it seems to us, of affordability around the world.
That is likely consistent with the US so-called Blue Nami. It's consistent with protests in France. And it's probably not just in the US or France.
It's more broadly than that. But we find it a little ironic that affordability concerns have led the market to price in a more dovish path for central banks. And it's ironic because you would think that if it's affordability, that's probably inflation.
People feel like they're not keeping up. And we've priced out central bank hikes as a result of that. Now, the irony is explained by the connection to risk assets.
Obviously, if you're more worried about growth, then risk is off. Then you're going to expect that we'll take care of inflation. But we would just observe that irony in that there are very real concerns about affordability everywhere.
And the market is interpreting that, at least in the rates space, to mean a more dovish central bank path around the world. So do with that observation what you will. It's just striking to us, especially after this week.
Okay. With that, let's conclude the call here. We wish everyone an excellent weekend.
We hope you can rest up after what was a pretty wild week in markets. And do trust that we're here for you if we can be of use. That's true for DTL Speak For You, you and your team.
It's also true for us and the rates team globally. And it's true for the broader B of A research franchise. So thank you, DTL.
Thanks, Stephen. Thank you, Katie. Thank you all for joining.
Have a great weekend. Thank you. Thanks for joining us today.
We hope you found this useful and that you'll tune in next week. Which includes B of A Global Research of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America N.A., member FDIC.
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