January 2026 FOMC Preview - Dovish under pressure? (Podcast Edition)

I'm John Cook and today I'm joined by George Goncalves, MUFG's Head of U.S. Macro Strategy. It's Tuesday, January 27th, 2026.

Welcome back to the podcast, George. Great to be on, as always. Yeah, good to have you.

Last time was a good one. We had you and Agron on. We reviewed the 2026 outlook.

We're a week or two later and I suspect there's plenty that's changed given the quantum of news we've received between now and then. But before we get into the episode, I did want to share some exciting news with our listeners. MUFG Securities America has announced that they're going to launch a new portfolio of MUFG Securities.

It's a new portfolio of MUFG Securities. It's a new portfolio of MUFG Securities. It's a new portfolio of MUFG Securities.

It's a new portfolio of MUFG Securities. been designated as a primary dealer by the Federal Reserve Bank of New York. This is a significant milestone that reflects the sizable investment MUFG has made in its global markets franchise and its long-standing commitment to U.S. markets generally and the U.S. treasury market more specifically. Now getting back to the episode, George, I'm not sure how you feel, but kind of as I was alluding to, 2026 has been filled with plenty of twists and turns and it's January.

January is not even over yet. We'll get into what's happened and if it's shifting your views or not, but we're coming back from multiple trips, multiple travels. You and I were in D.C. and Boston, I think two weeks ago.

You were in all over Europe last week, visiting a ton of clients. I'd like to start there. Being a little bit more specific, I guess what I want to get at is you have a wrap.

You've been going out and talking to clients. What has resonated with them? What have they agreed with?

What have they not agreed with? What are you sensing overall from the institutional investor community as you deliver our house views and your outlook for 2026? Thanks, John.

That's a great setup and yes, it's maybe useful to kind of recap what the view is and our listeners and our clients can go and find it on the MUFG research website. But just in general, our general view is that first half is slightly stronger than typical sort of growth that won't last, that we kind of get into the summer, into the end of the year, that we kind of get the economy decelerating again. The jobs market still is an issue for us.

That's really one of our key calling cards and remains so that we think unemployment rate is going to go higher, not lower, or stay stable, which is what the consensus is. And then inflation will grind over time down towards the Fed's target. All of this as well as just the calls for even lower rates coming from all corners of Washington DC, that there's going to be a scope for a number of cuts.

We have an out-of-consensus view of three, maybe even four cuts depending on who becomes the next Fed chair and that's kind of our base view and how that compares to consensus. The consensus is really, really bullish on the outlook for the economy, thinking that this is like a kind of key pivotal shift in the growth cycle that we're going to accelerate from here and it's going to be sustainable, that it's going to broaden out. We don't subscribe to that view, so that's the consensus view.

We think it's still too isolated to the actual AI sectors as well as more narrow industries. I would say that 80% of the clients really don't subscribe to our kind of that the economy is peaking early. They think that the economy has legs, so the 20% that do agree with us will agree more emphatically and I think really have similar views or even stronger views than we have when it comes to the risks that are present in the economy as well as markets.

So, I think it's like an 80-20 split is what I would kind of suggest in terms of how people are responding to our house view. 80% don't agree or kind of push back a little bit more and have more optimistic outlook and 20% are with us. But the important thing is those 20% are really with you. Exactly.

Alright, so that's the broad view, that's the sentiment we're getting from the client base. I'd like to get a little bit more micro for a second. We're recording this podcast on Tuesday the 27th, one day before the January FOMC meeting.

You recently published your January FOMC preview entitled Dovish Under Pressure. Let's go over for benefit of our listeners what you're expecting on Fed Day. Yes, this is the first Fed meeting of the new year.

It's also the first meeting they're going to skip after having cut three times in a row last year once they pivoted towards being concerned about the jobs market like we have been. So, it's going to be interesting to see what's the sort of messaging more than anything else. Yeah, Dovish Under Pressure, I know we've seen in the past the Fed will kind of oscillate between they'll cut, but they'll sound hawkish, but then when they're not cutting, they sound dovish.

For us, we still don't think there's enough information to unequivocally say that we've now seen actual job growth because we haven't really seen that yet pick up in a significant way, and we do think that Chair Powell after flagging that it's possible that the NFP has been overstating monthly job creation by over 60,000, it's possible that he kind of reiterates that message and that would be the dovish sort of signaling that we get from the Fed at this first meeting of the year. Which would be him sort of repeating himself, like that's a view that he's held and so him emphasizing that at this meeting would be taken dovishly, is that correct? Yeah, that's correct.

And also, it's also ahead of that key benchmark revisions which come out at the start of February. Since it's such a close call or it's coming up so soon, I should say, then it probably makes sense for them to be more cautious on the labor market before they have more information. Right, and plus you get no economic projections, so they're not going to cut, so it's sort of maybe one of those meetings that's just not as significant.

Is that the right read? Yeah, and it's a time to reflect and just kind of get prepared for the upcoming meetings where they may cut and there's still a path. We have it out of consensus view that we think that they should be cutting every other meeting which would suggest March, but the market clearly has nothing priced in for March and the hawks have been pretty aggressive and we're really waiting to see both what the Fed says in this first meeting and also that critical NFP which will have the revisions for the benchmarks.

If it's not enough to convince the Fed to cut every other meeting, then it looks like the first cut is going to be after Powell leaves, but we'll see. We don't want to prejudge and we think the markets are a little bit maybe too hawkish right now. Right, and presumably we could get President Trump announcing the new Fed chair at some point soon as well?

Yeah, exactly, and that's the other risk. It could happen at any moment, we don't really know, or it could still linger into the next meeting before the next meeting. But given all the sort of coverage and what's going on, we would anticipate it's coming up soon.

Great. Thanks, George. Okay, moving on, as MEFG, we'd be remiss to not discuss Japan, but also just we'd be remiss to not discuss Japan because it's really what's been moving markets globally.

The JGB market got destroyed on Monday and Tuesday of last week with 40-year yields I think topping out somewhere around 4.25%, which is probably 50 basis points higher over the course of maybe a month or something like that, and I think they sold off like 25 basis points in one day, which was nuts. They also had some serious price action in dollar yen with the press reporting that both the Bank of Japan and the New York Fed conducted rate checks on Friday. Dollar yen has gone from I think about 160 to below 153, so it's been a huge move on presumably no actual intervention.

So George, you've got great Japan game, you're a keen follower, you've been working at Japanese banks for over a decade. I think our listeners would appreciate understanding what's going on there, but also what it means for us and for the U.S. markets more specifically. Yeah, I would say half my career has been at Japanese institutions and clearly even before then, I've been focusing on Japan and how their rate markets just kind of evolved over the multiple lost decades and what it meant there and then also just the foreign flows as you know I track very closely, and so Japan is near and dear to everything that we do here, but also it's a key focus of mine as a kind of global rates bond strategist.

Japan is super important. And so yeah, the moves that you described are significant. I mean like what took place last week, but what's been happening, it's been crescendoing over time, but that move was a multi-sigma move in JGBs.

According to the Bloomberg sort of like liquidity metric that they provide, Japanese bond market JGBs are less liquid than all other major sort of G4 sovereigns, which is unheard of. And if you think about like if you look at certain parts of the vol surface, yen swaps are in vol terms, the implies are higher than U.S. implies in some parts of the world. So all this stuff, it's all noteworthy and critical because it's rare and it's unusual that it's happening in such a quick pace.

What's more impressive is that it hasn't really led to any sort of indications of stress per se, but the markets have reacted to it like U.S. rates were under pressure also in sympathy with the move. We did get the 10-year towards 430 and above. As a reminder, we think that the 10-year should be trading somewhere between 3.8 and 4.4.

That should be the range for the year. So we're getting dangerously close to that upper end. We still think that buying the dip makes sense in U.S. rate space, but when you get moments like this, it becomes like a liquidity vacuum.

So we think it's something that it's super important to watch. Japan in general plays a huge role both in capital formation as well as just buyers of U.S. debt over the decades. And plus just part of the global banking liquidity system, so watching closely around what's happening for the dollar plumbing, what it means for potential risks around repatriation or not, or maybe just the lack or less buying that might happen now that JVs are a viable alternative and attractive asset class with yields so high.

So all those things are things that we're watching very closely. Not to interrupt you, but there's an interesting article in Bloomberg about how the GPIF, the Government Pension and Investment Fund of Japan could reallocate assets towards JVs to kind of help solve some of these problems. So a good example of how price action like this could drive flows globally.

Yes, and pretty significant shifts in flows that could have consequences for the treasury market in the sense of maybe less buying at a time where we still have large deficits. So yes, these are obviously key things that we all watch at a time where the U.S., especially the U.S. administration wants lower long-term rates to try to solve the affordability issue that's impacting households more broadly, but specifically the housing sector and the mortgage market. In many ways, what happened in the last couple of weeks unwound the spread tightening that we saw in mortgages, for example, in terms of all-in mortgage rates are now equal to or as high before that announcement of the GSEs buying mortgages.

And so what's happening in overseas markets matters is I guess the bottom line and we're watching it very closely. We don't think it's a list trust type event. It's much bigger than that in the sense that the role that Japan plays, I don't think it's a minor thing that you can overlook.

Japan is the largest holder of U.S. treasuries outside of the U.S. to that point. You said this earlier, but incredible the illiquidity that that market experienced earlier in the week with the liquidity and GGBs deteriorating and making them the worst G7 bond market from a liquidity basis for the first time in a long time. Yeah, I mean, I'll just kind of end with like recapping what some of our internal researchers think and just my thoughts sprinkled in there too.

How do you get your arms around this? I'm sure we'll talk before February 8th is a key election coming up in Japan, the Bank of Japan itself, the BOJ could maybe get a little bit quicker to hike and that could also help provide some stability both for the yen and the rates market. And so those are the things that could engender some stability and then we have the key March 31st end of year fiscal year for Japan institutions which then could see a restarting of interest in fixed income markets starting in April.

I would be remiss to say despite all the carnage in the Japanese government bond market earlier last week, the market has rallied back and with the yield curve flatter and it's sort of unwound the lion's share of that damage. So, George, why don't we wrap it up there? I think we covered a lot of ground and for our listeners, if you have not already, I would encourage you to check out George's January FOMC preview entitled Dovish Under Pressure.

And if you are still not receiving George and his team's strategy reports, do check out the MEFG Research Portal at www.mefgresearch.com where you can find all of your favorite MEFG research as well as sign up to have it conveniently delivered to your inbox. Great stuff as always. Thanks for coming on the podcast.

Thank you, John, for hosting. And thank you for listening to the MEFG Global Markets Podcast. Rate, review and subscribe on Apple, Spotify or wherever you get your podcasts and reach out to your MEFG sales rep for any further information.

Check back soon for more insights from the Global Markets Research Team.