United States – Fed Focus Shifts to Labour… and Liquidity
Last week, the Federal Reserve delivered a widely expected 25 basis point cut, but markets focused on the clear dovish tone. Terminal rate expectations moved a few basis points lower as the Fed struck a more accommodative stance, explicitly flagging labour market weakness. The more notable surprise, however, came from the balance sheet. The Fed announced $40bn/month in T-bill purchases to ease pressure in bank reserves and funding markets, effectively restarting balance-sheet expansion for the first time in years. With the balance sheet already exceeding $6tn, both the timing and the size of the move caught markets off guard. Macro projections showed an upgrade to 2026 growth, while unemployment was left unchanged. The dot plot pointed to a deeply split FOMC for 2026, with dissent kept silent at this meeting. Markets responded positively to the overall message, with equities higher, yields lower and USD weaker. With only modest dovish pricing across the next three meetings, labour market data now becomes the key driver of whether this dovish shift is validated or reversed.
Central Banks – ECB Repriced, BoE in Play, BoJ Hiking.
Last week, a hawkish intervention by Isabel Schnabel triggered an ECB repricing, pushing rates a bit higher. This Thursday, the ECB is expected to remain on hold, with attention firmly on the new projections, especially whether the inflation undershoot deepens further. In the UK, the Bank of England is likely to cut 25 basis point in a finely balanced decision, as lingering hawkishness clashes with weakening growth momentum, confirmed by last week’s GDP data. In Japan, leaks confirmed the Bank of Japan will hike rates by 25 basis points, but no forward guidance is expected regarding the subsequent pace of tightening.
Algebris Investments’ Global Credit Team
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