Traders are adjusting their expectations for central bank policies due to concerns over global growth, following disappointing UMich data and negative tariffs reports. Central bank rate cuts are being anticipated by year-end, with the Fed expected to decrease rates by 80 basis points, while the ECB, BoE, BoC, RBA, RBNZ, and SNB also show various probabilities for rate adjustments.
For instance, there is a 92% chance of an ECB rate cut, and a 66% probability for the BoE. In contrast, the Bank of Japan’s expectations for a third rate hike have been slightly reduced, with only a 31 basis points change anticipated and a 77% probability of no change at the next meeting. These adjustments reflect the interconnectedness of global markets, influenced by external factors and events such as the impending US tariffs plan.
Shifting Market Sentiment
This shift in expectations highlights how swiftly market sentiment can turn when macroeconomic signals disappoint. The University of Michigan’s consumer sentiment data, coming in below forecasts, rattled confidence, particularly given recent signs that household consumption was already showing patchy momentum. This, paired with resurfacing tariff threats from the United States, has forced a reassessment of what central banks might do next.
Powell’s team now faces markedly more pressure to act. Futures are pricing in roughly 80 basis points of easing from the Federal Reserve by the end of the year. That’s not a modest recalibration—it’s a relatively aggressive shift, factoring in either multiple smaller cuts or fewer, more pronounced moves. Even if the current federal funds rate remains steady for the moment, the implied path ahead appears clearly biased toward accommodation.
Lagarde’s situation reflects a similar theme but in a more immediate fashion. Markets see a 92% likelihood of rate reduction from the ECB. The timing is now less a matter of “if” than “exactly when and by how much.” Europe’s economic weakness—already more entrenched—has made the eurozone especially sensitive to external shocks like trade friction or energy instability.
At Threadneedle Street, the probability sits just above two-thirds for easing. Bailey finds himself in a tighter spot. Inflation has been more persistent domestically than on the continent, yet wage growth is cooling and indicators like housing activity suggest pressure is creeping in. This places the Bank of England in a balancing act where delaying action may risk doing too little, too late—something we’ve seen in prior rate cycles.
Contrasting Central Bank Paths
Over in Tokyo, Ueda’s outlook offers an outlier. While global peers tilt toward stimulus, the Bank of Japan is encountering the opposite forces. Still, the probability of holding steady at their next meeting lies just above three-quarters, and the anticipated path of hikes has softened. The expected adjustment of just 31 basis points, as opposed to more assertive tightening, reflects that while Japan’s inflation is moving gradually higher, it’s not doing so in a straight line. Derivative pricing around short-term JGBs confirms that. The market is still testing the Bank’s willingness to allow rates to lift without choking off recovery.
Given these shifts, we need to reframe our positioning. Compression trades that assumed widening rate divergence—particularly long USD/JPY or short EUR/GBP stances—no longer carry the same appeal, and may soon present asymmetric downside. We’d be cautious about overextending those any further. In particular, forward curve flattening should prompt closer examination of gamma exposure, as long volatility trades may face drawdown if realised remains tepid while implied stays sticky.
It’s worth highlighting term structure distortions that are opening up in some rates products, especially in short-dated sterling and euro options. These may offer low-cost opportunities to express directional views while maintaining convexity. We’ve seen better two-way flows in EUR 3M10Y receivers, reflecting a belief in a steeper trajectory of ECB cuts than previously priced.
Trade volumes across interest rate swaps and bond futures also hint at a sharper alignment toward dovish positioning. That doesn’t guarantee follow-through, but it does suggest we’re entering a period where funding rates are likely to be priced with a downward bias. For most of us, that means preparing for heightened sensitivity to policy signals, particularly from speeches and meeting minutes over the next two cycles.
In North America, watch for dislocations in credit spreads tied to large rate bets. Spread widening in lower-rated corporate paper may offer a canary for risk reappraisal. We’ve already seen early signs of this among single-B issuers with short duration. Monitor those closely, especially ahead of monthly print cycles when liquidity tightens and market makers pull back bids.
There’s enough movement in terminal rate forecasts to begin questioning whether previous yield curve assumptions still hold. With moves in pricing accelerating, calendar spread structures should be reviewed and stress-tested for unexpected gaps. Pay attention to ways they might react to intraday volatility spikes, particularly when data surprises.
More broadly, traders should remember that while the rates direction now looks more skewed, the timeline is still dictated by incoming data. Slower growth isn’t a straight path to easing, and not all central banks will move in lockstep. For now at least, options markets continue to reflect higher uncertainty around timing than destination. That’s something we can use to calibrate our exposure more selectively.
