Deutsche Bank projects that the Federal Reserve will reduce interest rates by 25 basis points in December, changing from their earlier stance of no rate cuts in 2025. They also predict two additional 25 basis point reductions in the first quarter of 2026, with a terminal rate between 3.5% and 3.75%.
This week is anticipated to be pivotal for economic data releases. Notably, Jerome Powell’s speech is scheduled for Wednesday, April 16, 2025, at 1730 GMT. The Empire State survey will be released on Tuesday, April 15, 2025, at 1230 GMT, alongside the Philadelphia Fed manufacturing survey on Thursday, April 17, 2025, at the same time. Both surveys are expected to reflect deteriorating business sentiment linked to Trump’s policies.
Deutsche Banks Updated Forecast
Deutsche Bank’s updated forecast implies a shift in sentiment around long-term interest rate expectations. Where once it signalled a belief in extended restraint from the central bank, it now points toward a measured return to easing—starting at the close of this year, continuing into early 2026. The altered outlook suggests that fixed-income markets, and rate-sensitive assets more broadly, may start adjusting in response to a softer macroeconomic trajectory. Importantly, the mention of a terminal rate between 3.5% and 3.75% signals where their economists see policy stopping in the next cycle—a level notably lower than current conditions and potentially supportive for selected duration structures.
We need to pay closer attention now, not just to when interest rates might be trimmed, but to the tempo and messaging that guide these moves. Central to that will be Powell’s remarks this Wednesday. His previous tone has been consistent: watchful, cautious, and tied explicitly to data. The context this time is more charged. Investors are no longer asking merely whether the economy will slow—they are beginning to price in which tools will be used to cushion it. Should Powell lean toward confirming softer conditions and open the door to cuts, we may expect a reaction towards anticipated steepening in the yield curve.
Meanwhile, the two regional manufacturing indices out this week—the Empire State Survey and the Philadelphia Fed print—serve as an immediate gauge of industrial sentiment. Their function goes beyond signalling factory activity; they bring to light how executives and production managers feel about policy risks and demand trends. We anticipate both indices will come under pressure, with surveys likely reflecting the added strain that recent political disruptions are having on orders and supply channels. The result? Possibly more price sensitivity in commodities and short-term hedging in industrial-weighted sectors.
Souring Regional Outlooks
A souring in regional outlooks from major economic centres can carry through rapidly to positioning. These reports come early in the monthly data cycle, which means they often help direct expectations for national manufacturing numbers or PMI trends. If those preliminary readings slump, that weak tone may carry into the broader implied volatility metrics—particularly those tied to macro-sensitive asset baskets.
We, like many, are tracking rate path expectations through implied policy curves and analysing skew in STIR derivatives. Since implied volatility remains relatively compressed, subtle changes in the forward guidance from Powell or the manufacturing surveys may reveal themselves first in optionality before moving to spot values. Options on SOFR or short-dated Treasuries may therefore warrant closer scrutiny in the days ahead.
The forward outlook on rates, when restated publicly, tends to influence the way volatility smiles respond. A more dovish turn from Powell could also prompt a rebalancing in positions that had been skewed toward holding higher-for-longer rates. This readjustment, combined with softening business sentiment, might allow for strategic reentry at more attractive implied yield levels. We may also expect a shift in how forward curves are constructed, particularly in the belly of the curve, where rate-sensitive instruments often respond more acutely.
In the coming sessions, it might be advisable to observe calendar spreads and diagonals for clues on how market participants are timing the first cut. Directional trades may hinge on small cues within the wording of Powell’s guidelines, or the magnitude of decline in headline indices later this week.
There is little room for indifference now. The market is signalling adjustment, and it will reward those nimble enough to read the inflection when it comes.
