The Federal Reserve and the European Central Bank are expected to join hands to suspend, so why is it still difficult for global funding to breathe a sigh of relief? J.P. Morgan's outlook: The logic of continuing interest rate hikes is still suppressing equity bonds

The Zhitong Finance App learned that this week can be called “Supercentral Bank Week” — the US, Japan, and the European Central Bank will hold monetary policy formulation meetings one after another. Among them, the US Federal Open Market Committee (FOMC), which is the most market-focused, will announce interest rate decisions and monetary policy statements on Wednesday local time. According to a recent research report released by J.P. Morgan Chase, the core financial market trading clue linked to the European and American central banks and the Bank of Japan's monetary policy decisions this week is how strong the central banks will maintain their austerity tendencies after announcing the suspension of interest rate hikes in October, as expected by the market, and when they are expected to shift to an easing path.

The Federal Reserve will announce its resolution in the early morning of October 29, Beijing time, and the ECB will take over that evening. According to two recent Asian market research reports released by J.P. Morgan Chase on October 26, both central banks remained on hold this week, but the Federal Reserve still needs to explain how the suspension is compatible with anti-inflation commitments, while the ECB may continue to raise interest rates in December and March next year. The main investment line that J.P. Morgan strategists have extracted from this is that the short-term interest rate market will pay attention to how expectations for subsequent interest rate hikes will change; European sovereign bonds, which are critical to the European financial market, will pay close attention to the ECB's wording on fiscal risk and the central bank's intervention threshold; and the stock market will continue to pay attention to the ability of profit and cash flow growth paths to the denominator side under high capital costs.

J.P. Morgan said that the Federal Reserve and the European Central Bank may join hands to suspend interest rate hikes this time, but the subsequent austerity pressure is still there — the Fed needs to explain how the suspension is compatible with the market's tendency to raise interest rates, and the ECB is determined by J.P. Morgan strategists to continue to raise interest rates in December and March next year.

Federal Reserve Chairman Walsh faces a “suspended test question”: the market wants not only results, but also the next monetary policy logic for December and beyond

J.P. Morgan predicts that the Federal Reserve will maintain the federal funds rate target range of 3.75% to 4.00%. Cleveland Federal Reserve Chairman Hamak and Dallas Federal Reserve Chairman Logan may cast two votes against raising interest rates. There is a possibility that Kashkari will also join, but this is not a benchmark judgment.

J.P. Morgan said that the suspension of expectations mainly comes from dovish signals continuously released by officials such as Williams, Jefferson, Bowman, and Waller — that is, there is no need to rush further monetary policy actions, and there is no need to raise interest rates for two consecutive meetings. Based on this, J.P. Morgan speculates that some FOMC members may be surprised that the market interpreted the September resolution too hawkish, and are not convinced that a continuous and comprehensive monetary policy tightening cycle needs to be initiated. The main reason for this suspension is to further observe the transmission effects of the last rate hike against the backdrop of weak non-agricultural data but heavy pressure from energy inflation and the US economy still showing resilience.

What really needs to be explained by Walsh is that the Federal Reserve's FOMC monetary policy meeting in September chose to raise interest rates against the backdrop of a 0.2% month-on-month increase in the core personal consumption expenditure price index (that is, the Federal Reserve's most popular inflation indicator - core PCE), but this time, in the face of an expected 0.3% reading, they may have chosen to suspend interest rate hikes.

J.P. Morgan expects that the statement's judgment on the economic situation will not change drastically, but the wording will be adjusted: the last policy action supported a “more timely” return of inflation to the target. There are no new actions this time. It may be changed to a promise to “restore price stability in a timely manner” and add “ready to act” or “act when necessary.” These statements can show that the Commission still retains the trend of raising interest rates, and also helps maintain the market's pricing for the December rate hike; it is worth noting that J.P. Morgan's strategists did not clearly list the Fed's December interest rate hike as an inevitable result in this report.

Walsh's communication challenge is to coordinate the relationship between “not predicting the outcome of each meeting” and “explaining the policy reaction function (Reaction Function).” J.P. Morgan pointed out that conveying the trend of interest rate hikes itself is a kind of forward guidance (Forward Guidance), and Greenspan, which Walsh advocates, also used it; while the midterm elections are approaching, a suspension without explanation can easily trigger market speculation about policy motives.

According to this, J.P. Morgan Chase deduced that the focus of the transaction was that the statements, negative votes, and press conferences were hawkish compared to market expectations: expectations of subsequent interest rate hikes were raised, which is more likely to raise short-term yields and lower the price of related interest rate futures — expectations of subsequent interest rate hikes will heat up, which may drive up implied interest rates on short-term treasury bond yields and federal funds rate futures, while the latter reduces the corresponding futures prices; the lower expectations are transmitted in reverse. Long-term bonds and technology stocks also need to absorb inflation, term premiums, and profit changes at the same time. In particular, new financing costs for AI companies depend on the corresponding term benchmark interest rate and credit spread. The valuation support that can be brought about by policy suspension needs to be realized through these steps.

Another Wall Street financial giant Goldman Sachs's senior market strategist team still uses the scenario of suspending interest rate hikes in October and returning to interest rate hikes in December. The market price quoted was about 90% on October 23, and the cumulative rate hike forecast for September 2027 was about 2.7 times (starting from the policy interest rate on October 23). Goldman Sachs strategists said that since an interest rate hike has been roughly calculated, the real surprise mainly comes from the intensity of subsequent austerity, the time interest rates remained high, and the reasons behind suspending or raising interest rates.

A recent research report released by strategist Cosimo Codacci-Pisanelli attributed the recent rise in US bond prices (rising bond prices to a decline in yield indicators) due to pressure on AI assets, rising risk at the end of the market in anticipation of declining growth, and the re-emergence of long-term treasury bonds as a hedge against stock risk.

Goldman Sachs deduces that if the December rate hike simultaneously sends a signal of continued tightening, the discount rate and financing pressure on technology stocks may rise again; if the suspension is due to a marked weakening of AI investment and economic growth, the rise in US Treasury bonds with a term of 10 years or more will not necessarily lead to a rise in technology stocks, because profit expectations and credit quality may deteriorate at the same time. Walsh refused to promise a path ahead of time, making the market even more in need of judgment: whether inflationary pressure or changes in growth and financial conditions are dominating the Federal Reserve's next move.

The ECB may suspend interest rate hikes, but the austerity is not over yet: energy inflation continues to be pressured, and the threshold for intervention in the French bond market is still high

J.P. Morgan Chase's judgment on the ECB's path is more clear: suspended this week, continued interest rate hikes in December 2026 and March 2027, and another increase in June 2027 is a risk of a partial eagle. The report points out that the market has already included at least the fourth rate hike in this round. The bank generally agrees, and believes that there is a possibility of a fifth and final rate hike in this round.

What supports J.P. Morgan Chase's judgment is growth resilience and inflationary stickiness: although the initial value of the purchasing managers' index (PMI) declined in October, it still corresponds to an annualized economic growth rate of about 1.5%, which is in line with the short-term growth forecast after excluding Ireland; the interest rate path used by staff in September already included a cumulative total of slightly more than three interest rate hikes, and core inflation was still above target until the second half of 2028. The continued rise in oil and gas may further widen the deviation from inflation and prolong the return process. Interest rate hikes cannot increase energy supply, but they can limit the transmission of energy price increases to broader price and inflation expectations; the new forecast extended from December to 2029 will be an important basis for re-evaluating the extent of austerity.

French treasury bonds are under pressure, and this is not enough for the ECB to complete the remaining austerity. J.P. Morgan acknowledged that rising long-term yields and widening sovereign spreads can partially replace interest rate hikes, but their impact must be measured across the Eurozone: the sovereign difference variable in the ECB's Macrofinancial Condition Index (FCI) is weighted by countries' GDP and accounts for only about 15% of the index; French pressure was diluted as a result, and the decline in German treasury yields. As of the latest data quoted in the report, the index has declined slightly in the past two weeks.

The tightening of financial conditions since August has indeed reduced some demand for interest rate hikes, yet the judgment of adding two more times has not changed. Growth resilience is also not a permanent guarantee. If the rise in energy is not offset by other growth drivers, it will still depress economic activity, but its net impact on policies is likely to continue to be hawkish. As far as bond trading is concerned, German treasury bonds are supported by safe-haven purchases, and the rise in French debt risk premiums can occur simultaneously; the trend of the euro needs to be judged by combining the relative interest rate paths of Europe and the US with French risk.

At the same time, J.P. Morgan believes that it is extremely unlikely that the ECB will launch the Transmission Protection Instrument (TPI) this week after a lapse of many years, and that there is no sufficient basis for slowing down or ending quantitative tightening (QT). The agency said that the primary responsibility to resolve France's fiscal concerns lies with the government and presidential candidates putting forward credible fiscal adjustment promises; even with promises, market pressure worsens dramatically, making it more likely that a council consensus supporting intervention will be formed.

In an environment where inflation is higher than the target and the debt trajectory of some countries is questionable, slowing down the expiration and contraction of asset purchase plans (APPs) and the Pandemic Emergency Debt Purchase Plan (PEPP) in order to trust the bond market is also facing resistance. Future structured bond portfolios to manage excess reserves are unlikely to be introduced early just to ease financial concerns; in contrast, discussions on raising banks' minimum reserve ratios are easier to delay. Therefore, J.P. Morgan emphasized that betting on a narrowing of interest spreads in France needs to be supported by improved fiscal credit or changes in intervention conditions. The two-way risk of energy prices brought about by the Middle East situation and the further escalation of pressure on sovereign bonds are two major variables that may change this path, and the ECB will continue to evaluate each meeting.