Fed and ECB Poised to Pause Together, So Why Is Global Funding Still Struggling for Relief? JPMorgan Outlook: The Logic of Continued Rate Hikes Is Still Weighing on Stocks and Bonds

Title context: Fed and ECB Poised to Pause Together, So Why Is Global Funding Still Struggling for Relief? JPMorgan Outlook: The Logic of Continued Rate Hikes Is Still Weighing on Stocks and Bonds Text: This week is a veritable "super central bank week" the U.S., Japanese and European central banks will successively hold monetary policy meetings, with the market most focused on the Federal Reserve's Federal Open Market Committee (FOMC), which will announce its interest rate decision and monetary policy statement on Wednesday local time. JPMorgan's latest research report shows that the core trading thread in financial markets linked to this week's monetary policy decisions by the European and American central banks and the Bank of Japan is how strong a tightening bias the major central banks will maintain after announcing a October rate-hike pause, as the market unanimously expects, and when they are expected to shift to an easing path. The Fed will announce its decision in the early hours of October 29 Beijing time, with the European Central Bank taking over that evening. Two JPMorgan Asia-session research reports newly published on October 26 show that both central banks will hold steady this week, but the Fed still needs to explain how a pause is compatible with its anti-inflation commitment, while the ECB may continue raising rates in December and next March. The investment main lines JPMorgan strategists distill from this are the short-end rates market will focus on how subsequent rate-hike expectations change; for European financial markets, eurozone sovereign bonds, which are crucial, will closely watch the ECB's wording on fiscal risks and the threshold for central bank intervention; and the equity market will continue to focus on the ability of earnings and cash flow growth paths to withstand the denominator side under high funding costs. JPMorgan says the Fed and ECB may pause rate hikes together this time, but subsequent tightening pressure remains the Fed needs to explain how the pace of the pause is compatible with the market's rate-hike bias, while JPMorgan strategists price the ECB to continue raising rates in December and next March. Fed Chair Warsh Faces a "Pause Test": The Market Wants More Than the Result It Wants the Next Step in Monetary Policy Logic for December and Beyond JPMorgan expects the Fed to keep the federal funds rate target range at 3.75%4.00%, with Cleveland Fed President Hammack and Dallas Fed President Logan possibly casting two dissents in favor of a rate hike, and Kashkari also a possible joiner, though that is not the base case. JPMorgan says the pause expectation mainly comes from dovish signals repeatedly sent by officials including Williams, Jefferson, Bowman and Waller namely that there is no need to rush further monetary policy action, nor to hike at two consecutive meetings. JPMorgan thus speculates that some FOMC members may be surprised by the market's interpretation of the September decision as too hawkish, and are not yet convinced of the need to launch a sustained and comprehensive monetary tightening cycle. The main reason for this pause is to further observe the transmission effects of the last rate hike against a backdrop of weak nonfarm payrolls but heavy energy inflation pressure and a U.S. economy that still shows resilience. What Warsh really needs to explain is that the Fed's September FOMC monetary policy meeting chose to hike against a reading of a 0.2% month-on-month rise in the core personal consumption expenditures price index (the core PCE, the Fed's favorite inflation gauge), while this time, facing an expected 0.3% reading, it may choose to pause. JPMorgan expects the statement's judgment on the economic situation will not change substantially, but the wording will be adjusted: the last policy action supported inflation's return to target "more promptly"; with no new action this time, it may change to a commitment to "restore price stability in a timely manner," and add "ready to act" or "act as necessary." These expressions can show the committee still retains a rate-hike bias and help maintain market pricing for a December hike; notably, JPMorgan strategists in this report did not explicitly list a December Fed hike as a necessary outcome. Warsh's communication challenge lies in reconciling "not pre-committing to the outcome of every meeting" with "explaining the policy reaction function." JPMorgan points out that conveying a rate-hike bias is itself a form of forward guidance, which Greenspan, whom Warsh admires, also used; and with midterm elections approaching, a pause lacking explanation easily invites market speculation about policy motives. JPMorgan thus deduces that the trading focus is how hawkish the statement, dissents and press conference are relative to market expectations: somewhat higher subsequent rate-hike expectations are more likely to lift short-end yields and depress related interest rate futures prices rising subsequent rate-hike expectations may push up short-end Treasury yields and the implied rates of federal funds rate futures, with the corresponding futures quotes falling; lower expectations transmit in the opposite direction. Long bonds and tech stocks must simultaneously digest inflation, term premiums and earnings changes; in particular, AI companies' new financing costs depend on benchmark rates of corresponding maturities and credit spreads, and the valuation support a policy pause can bring needs to be realized through these links. Another Wall Street financial giant, Goldman Sachs's senior market strategist team, still uses an October pause and a December return to hiking as its base case, citing October 23 market pricing of about 90%, and cumulative rate-hike expectations of about 2.7 hikes through September 2027 (starting from the policy rate at the time on October 23). Goldman strategists say that since one hike is largely priced in, the real surprises mainly come from the magnitude of subsequent tightening, how long rates stay high, and the reasons behind a pause or hike. Strategist Cosimo Codacci-Pisanelli recently published a research report attributing the recent rise in U.S. Treasury prices (a rise in bond prices corresponds to a decline in yield indicators) to pressure on AI assets, rising tail risks under growth-downside expectations, and long-term Treasuries regaining their role as an equity risk hedge. Goldman thus deduces that if a December hike is accompanied by signals of continued tightening, tech stocks' discount rates and financing pressure may rise again; if the pause stems from a marked weakening of AI investment and economic growth, a rise in 10-year and longer U.S. Treasuries may not necessarily bring tech stock gains, because earnings expectations and credit quality may deteriorate simultaneously. Warsh's refusal to pre-commit to a path makes it all the more necessary for the market to judge: is it inflation pressure, or changes in growth and financial conditions, that is dominating the Fed's next move? ECB May Pause Rate Hikes, But Tightening Is Not Over: Energy Inflation Continues to Pressure, France's Bond Market Intervention Threshold Remains High JPMorgan's path judgment for the ECB is clearer: a pause this week, continued hikes in December 2026 and March 2027, with another hike in June 2027 as a hawkish risk. The report notes the market has priced in at least a fourth hike in this cycle, which the firm broadly agrees with, and sees the possibility of a fifth, and final, hike in this cycle. Supporting JPMorgan's judgment are growth resilience and inflation stickiness: although the October preliminary Purchasing Managers' Index (PMI) fell, it still corresponds to an annualized economic growth rate of about 1.5%, in line with short-term growth forecasts excluding Ireland; the rate path used in the September staff projections already included cumulative slightly more than three hikes, and core inflation remains above target through the second half of 2028. Continued rises in oil and gas may further widen the inflation deviation and prolong the return process. Rate hikes cannot increase energy supply, but can restrain the transmission of energy price increases into broader prices and inflation expectations; the new projections in December extending to 2029 will become an important basis for reassessing the magnitude of tightening. French government bonds are under pressure, but not enough to complete the remaining tightening on the ECB's behalf. JPMorgan acknowledges that rising long-term yields and widening sovereign spreads can partially substitute for rate hikes, but their impact must be measured across the entire eurozone: the sovereign spread variable in the ECB's macro-financial conditions index (FCI) is weighted by each country's GDP and accounts for only about 15% of the index; French pressure is thus diluted, and combined with falling German Bund yields, the index actually edged down over the past two weeks as of the latest data cited in the report. The tightening of financial conditions since August has indeed reduced some of the need for rate hikes, but has not yet changed the judgment of two more hikes. Growth resilience is also not a permanent guarantee; if energy rises without other growth drivers offsetting it, it will still weigh on economic activity, but its net impact on policy may continue to be hawkish. For bond traders, German Bunds supported by safe-haven buying and rising French debt risk premiums can occur simultaneously; the euro's movement needs to be judged in conjunction with the relative rate paths of Europe and the U.S. and French risks. JPMorgan also believes it is extremely unlikely that the ECB will launch the Transmission Protection Instrument (TPI) this week for the first time in years, and that slowing or ending Quantitative Tightening (QT) also lacks sufficient basis. The institution says the primary responsibility for resolving French fiscal doubts lies with the government and presidential candidates putting forward credible fiscal adjustment commitments; only if market pressure deteriorates sharply even with commitments in place would a Governing Council consensus supporting intervention be more likely to form. In an environment of above-target inflation and questionable debt trajectories in some countries, slowing the balance-sheet runoff from the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP) to support the bond market also faces resistance. A future structural bond portfolio used to manage excess reserves is also unlikely to be rolled out early merely to ease fiscal concerns; by contrast, discussion of raising banks' minimum reserve ratios is easier to defer. Therefore, JPMorgan stresses that betting on a narrowing of French spreads requires improved fiscal credibility or changed intervention conditions as support. The two-way risks to energy prices from the Middle East situation, and further escalation of sovereign debt pressure, are the two major variables that could change this path; the ECB will still assess meeting by meeting.