The disinflationary process is well underway and major developed market central banks have started delivering rate cuts. After holding off on policy easing through the year, the Fed delivered its first rate cut of 50 bps in September. Fed Chair Powell emphasised that the move signals a policy stance recalibration from restrictive levels and is a sign of the central bank’s commitment “not to get behind”.

The Federal Open Market Committee’s (FOMC) median projection for the federal funds rate implies two further 25-bps rate cuts in 2024, spread over the remaining meetings this year. This marks a notable step up from the June projection which had just one 25-bps cut for 2024. As at 30 September 2024, markets continue to expect relatively more aggressive rate cuts than the median FOMC projection, pricing in two 25-bps rate cuts and approximately 60% probability of another by year end. With the Fed’s emphasis on a data-dependent approach and its shifting focus towards employment, we expect labour market conditions to be crucial in driving the path for future policy decisions. In a similar vein, the Bank of England and European Central Bank also eased by 25 bps each in the third quarter of 2024, with officials emphasising data-dependence and not pre-committing to a particular rate path.

Policy divergence is likely to remain front of mind for investors in the coming months. The Bank of Japan continues to be an outlier in developed markets, embarking on a hiking cycle to end an era of negative interest rates. We retain a relatively cautious view on Japanese rates given the potential for more policy adjustments, partly in response to any currency pressures. In Europe, the path of policy loosening could be dependent on policymakers’ focus on the downside risks to growth, balanced against the pace and progression of easing wage pressures and services inflation.

Our conviction in yield curve steepeners remains with a preference for the US and, to a smaller extent, Europe. While recessionary risks do not appear imminent, there is broad acknowledgement that the risk of recession persists, despite not being the most probable outcome. Positioning for the yield curve steepener continues to add value under a wide range of potential economic scenarios and outcomes. Additionally, the Fed is expected to undertake the most substantial rate-cutting phase among global central banks having been the most aggressive in the rate-hiking process.