MACRO
FOMC meeting: Fed pause keeps December hike in play
David Kohl, Chief Economist, Julius Baer
The Federal Reserve left interest rates unchanged while maintaining a hawkish message amid still-elevated inflation and resilient economic growth. Although underlying inflation trends remain contained, policymakers appear reluctant to declare victory, leaving the door open to one final rate increase before an extended pause in 2027.
The Federal Reserve held its benchmark interest rate steady at 3.75%–4.00% on Wednesday, delivering a decision that was widely anticipated by economists. However, it remains prepared to raise rates once more, most likely at its next meeting. The Federal Open Market Committee voted 10–2 to keep rates unchanged, with Cleveland Fed President Beth Hammack and Governor Lisa Cook dissenting in favour of a quarter-point increase. Inflation remains above target and has risen on the back of higher energy costs, while the economy continues to expand at a solid pace. As a result, the likelihood of further monetary tightening remains elevated following this week’s pause, which appears to reflect consideration of next week’s Congressional election and the uncertainty surrounding the direction of underlying inflation. Higher energy prices are pushing up headline inflation, while measures of underlying inflation show few signs of a renewed acceleration. This has allowed Chair Kevin Warsh to state that he was encouraged by the progress made over a relatively short period of time. We interpret this as a dovish shift in the Chair’s rhetoric, signalling that any further improvement on the inflation front could be sufficient to bring the current Fed tightening cycle to an end. At the same time, the Fed remains reluctant to view the tightening in financial conditions resulting from higher Treasury yields as sufficient to slow economic activity and substitute for an additional rate hike. We continue to expect the Fed to raise the federal funds target range once more at its December FOMC meeting, as upcoming inflation releases are likely to keep inflation risks above the Fed’s target while economic growth remains resilient. Thereafter, we expect an extended pause in 2027, supported by lower inflation readings and moderating economic activity. The Fed also announced a reduction in the number of FOMC meetings at which rate decisions are taken, from eight currently to seven in 2027 and six in 2028, in an effort to allow more time for informed policy decisions.
COMMODITIES
Natural gas: A crowded bet on a cold winter and Iran war escalation
Norbert Rücker, Head Economics and Next Generation Research, Julius Baer
European natural gas prices surged above EUR 100 yesterday, the highest level since late 2022. The narrative is obvious; the supply shock on the back of the Iran war and the lack of Qatari exports. However, taking a closer look, the natural gas market indeed is coping quite well with the disruption, and Europe is unlikely running empty on storage this winter. These considerations matter less in a market setting, where the willingness to pay, geopolitical escalation fears and winter weather concerns prevail. Acknowledging the current dynamics, we lift our view to Neutral and lower our confidence to low. In the very near term, European prices could well test new highs as supply fears prevail, but towards mid-2027 a likely Qatari recovery and the liquefied natural gas glut should pressure prices.
The narrative on the natural gas market is the obvious one: the lasting outage of Qatar’s liquefied natural gas exports due to the prolonged Iran war brings a substantial supply shock. This narrative has propelled prices to highs last seen in late 2022, the aftermath of the post-pandemic and Ukraine war related energy shock. European natural gas surged beyond EUR 100 temporarily yesterday. Taking a closer look, the narrative becomes more complicated. Indeed, unlike oil, there is still a very limited flow of natural gas through Hormuz. However, also unlike oil, the natural gas market has a greater flexibility to adjust demand to supply shocks, and is experiencing substantial, structural supply growth. Despite Qatar’s sizeable outage, global liquefied natural gas supplies are on the same level of two years ago. Over the same period western world demand has stagnated or slightly declined. The difference is the expansion in liquefied natural gas export capacity, namely in North America. The impact of this structural glut has been postponed but not called off and it will eventually put significant pressure on prices. The Qatari supply shock is difficult to spot. The sparsely available data does not show a deficit in Asia. Japan’s natural gas storage is filled above seasonal norm. In China, strong domestic production growth fills storages and eases the need for imports. There is the much-discussed storage deficit in Europe. However, large parts of this deficit are a carry-over from the previous heating season and from before the conflict. Since March, Europe’s deficit has widened somewhat but not the extent as the Middle East outage would imply. Adjusted for lower demand and measured in days of supply, European storage is not in deficit. Globally, demand indeed proved flexible and some natural gas use was substituted with coal use at the power plants. The trigger came from prices and the gap that opened between natural gas and coal. The combination of rising exports elsewhere and partially price-sensitive demand in large parts helped absorb the Iran war related shock. Importantly, Qatar’s exports traditionally were seasonally stable and thus their disruption does become a more pressing issue as Europe and Northeast Asia enter the winter heating season. However, these considerations matter less in the current market setting where the willingness to pay dominates the pricing dynamics. This willingness is difficult to pin to specific levels as prices in a wide range between EUR 60 to EUR 100 likely are sufficient to redirect overseas shipments towards Europe. This willingness is greatly influenced by sentiment, conflict escalation risks and winter weather risks. Importantly, because Europe has the highest willingness to pay, it will likely never run dry on natural gas. Exactly this dynamic was tested and proven in 2022. Our view on natural gas has been quite inaccurate since summer. Acknowledging the current dynamics, we lift our view to Neutral and lower our confidence to low. In the very near term, European prices could well test new highs as supply fears prevail, but towards mid-2027 a likely Qatari recovery and the liquefied natural gas glut should pressure prices. We adjust our price targets accordingly.
FIXED INCOME
UK autumn budget: No tricks, some treats
Afonso Borges, Fixed Income Research, Julius Baer
David A. Meier, Economist, Julius Baer
Today’s UK Budget was supportive for gilts. While borrowing is set to remain slightly higher than previously projected, Chancellor Healey largely preserved the government’s fiscal discipline. The energy price shock following the Iran conflict raised inflation and debt-interest costs, reducing the fiscal buffer and leaving limited room for growth supportive measures. Combined with a weaker growth outlook and limited scope for additional Bank of England tightening, the fiscal and issuance backdrop remains underappreciated.
The long-awaited first Budget of Chancellor John Healey delivered few surprises and was modestly supportive for gilts. Higher energy-related inflation and borrowing costs following the Iran conflict had already eroded part of the roughly GBP24bn fiscal buffer inherited from former Chancellor Rachel Reeves, leaving limited room for growth supportive measures. Instead, the government opted for a balanced package combining targeted energy support, including a GBP 100 payment for around 20 million households, with revenue-raising measures such as a temporary increase in the bank surcharge from 3% to 6%, which was less aggressive than some had feared. While borrowing is projected to exceed the March forecast throughout the comparable forecast period, it still declines from 4.2% of GDP in FY2026/27 to 1.8% in FY2031/32. The government also continues to meet its fiscal rules, with the current budget moving into surplus in FY2029/30 and leaving a headroom of GBP15bn. For markets, the key takeaway is that fiscal credibility has been preserved despite a weaker growth outlook. This should help contain the gilt risk premium while reducing pressure on the Bank of England to deliver the extent of monetary tightening currently priced into markets. Further, the UK’s Debt Management Office has announced it will launch 12-month bills from January (until now, the UK has only issued bills at maturities of one, three, and six months) – as we have argued in the past, there is abundant room for T-bills to rise as a share of UK debt outstanding, which alleviates some of the issuance concerns at the margin. Against this backdrop, yields edged lower and gilts outperformed peers following the announcement, while sterling also strengthened. We recently upgraded our GBP forecast, reflecting the increased likelihood of an insurance rate hike in November and the growing contrast between the UK’s fiscal discipline and elevated fiscal uncertainty in France. While we see limited scope for significant further sterling appreciation, as markets appear to overprice additional Bank of England tightening, renewed political or fiscal tensions in France could continue to support GBP against EUR. Overall, the combination of fiscal restraint, adherence to the fiscal rules, and softer growth reinforces our constructive medium-term view on gilts.
China: CGBs serve as portfolio diversifier as global risks increase
Magdalene Teo, Fixed Income Analyst Asia, Julius Baer
A weaker growth outlook and higher energy costs are compounding fiscal concerns across Europe. Most of these fiscal challenges are unlikely to materially affect Asia, although a rise in global sovereign risk premia could exert some pressure on regional bond markets. Against this backdrop, Chinese government bonds (CGBs) remain a valuable portfolio diversifier and strategic allocation. Despite their low carry, support from a stable CNY, sizeable foreign exchange (FX) reserves, persistent current account surpluses and an accommodative monetary policy stance should help cushion their performance relative to other bond markets. The People’s Bank of China’s overnight repo shift is seen as an easing bias, supporting CGBs, and may drive a bull-flattening as investors extend duration.
China’s CGB yield continued to reach new lows driven less by rate differences with US Treasuries (negative rate gap of 3.3% for the 10-year bond) but increasingly more by the PBoC’s easing bias. The 10-year CGB yield is lower by 22bps compared with start of the year, as China’s improving energy security and subdued inflation pressures help to anchor inflation expectations, providing the PBoC with room to adopt an accommodative policy environment to support economic growth. In our article titled ‘China: A shift to the overnight policy rate benchmark will benefit bonds’ published in The Wire on 21 October 2026, we wrote that the PBoC’s policy benchmark shift to the overnight repo rate is supportive of CGBs, as lower funding rates enhance bond valuations. The CGB yield curve could bull-flatten, as investors seeking yield may extend duration into 5-to-10-year maturity segments. Amid rising global risks and concerns over widening sovereign risk premia, investors are increasingly questioning whether CGBs offer a viable alternative to traditional USD- and euro-denominated bonds. The CNY remains one of Asia’s most resilient currencies, supported by strong sovereign fundamentals, ample FX reserves, a persistent current account surplus and low reliance on external financing. The CNY is Asia’s second-best performing currency this year, gaining 4.9% against the USD and 10.5% against the euro. In our view, despite low carry and yield disadvantage, CGBs remain a strategic allocation, offering diversification benefits amid rising global risks and supported by CNY stability and an accommodative policy backdrop. The Chinese bond market is still not ready to be a stable alternative to the traditional fixed income market due to constraints around CNY and the depth of its bond market. While it is the second largest bond market in the world, foreign ownership in China’s CNY bond market remains low compared with developed markets, as the CNY is not freely convertible, and capital flows are not fully liberalised. CNY liquidity has improved over the years given sizeable FX reserves and the inclusion of CGBs in major global indices, however, the currency remains materially less liquid than USD bonds and is also less liquid compared with the JPY internationally. Unlike the CNY, the JPY is fully convertible and benefits from deep bond and hedging markets, reinforcing its reserve and safe-haven status. Foreign investors interested in exposure to Chinese bonds primarily favour CGBs given their sovereign status, followed by higher-yielding policy bank bonds, which are widely regarded as quasi-sovereign securities. We remain cautious on weaker state-owned enterprises and corporate credits amid a subdued economic outlook. While funding costs are likely to decline, authorities are expected to maintain tight risk controls, limiting financing access for issuers with stretched balance sheets and elevated leverage.
Chile: Central bank turns more cautious amid inflation risks
Eirini Tsekeridou, Fixed Income Analyst, Julius Baer
The Central Bank of Chile left its policy rate unchanged at 4.5%, in a unanimous decision. The outcome was fully in line with market expectations and prevailing investor positioning. While policy settings were unchanged, the statement highlighted rising global inflation risks and tighter financial conditions, signalling a more cautious policy stance. For investors, the message reduces the likelihood of near-term easing with markets now pricing in a 25bp hike over the next six months, which is modestly supportive for the Chilean peso (CLP).
The Central Bank of Chile (BCCh) kept the monetary policy rate unchanged at 4.5% at its October meeting, in a unanimous decision and fully in line with market expectations. The statement highlighted a worsening external inflation backdrop, noting that Middle East tensions have lifted energy prices while El Niño-related disruptions have started to affect global food prices. The BCCh also pointed to tighter global financial conditions, reflected in higher long-term yields, a stronger USD, weaker equity markets, and a softer CLP. While policymakers refrained from signalling the next move and reiterated a meeting-by-meeting, data-dependent approach, the stronger emphasis on inflation risks suggests a less dovish bias than earlier this year. As the decision was largely priced in, we expect limited impact on the front end of the curve. However, reduced expectations for future rate cuts are mildly negative for duration. For the CLP, the decision is supportive as it enforces Chile’s positive real rate environment, although external drivers like copper prices, global risk sentiment and USD strength will remain the dominant performance determinants. We keep our Hold/Quality view on Chile’s government bonds and Neutral stance on equities.
