The US Federal Reserve Chair Jerome Powell reaffirmed last week that the central bank remains on track to deliver further rate cuts this year, citing growing downside risks to employment. Markets now price in a 99% probability of a 25bp cut at the October 29 meeting and 95% for another in December. Powell also addressed the balance sheet runoff, signaling a more cautious stance and hinting at an early end to Quantitative Tightening (QT) as bank reserves have slipped below 10% of GDP, a level consistent with “ample,” but no longer “abundant,” liquidity. He stressed the Fed’s intent to avoid money market stress akin to September 2019 and reiterated a long-term goal of holding primarily Treasury securities. Meanwhile, the Beige Book suggested stable but uneven growth, persistent input-cost pressures, and a cooling yet balanced labor market, a backdrop that can warrant some degree of monetary policy easing going forward.

In Europe, ECB President Christine Lagarde said inflation risks have become more symmetric as trade tensions ease, reducing the likelihood of further rate cuts after eight already delivered. The ECB will continue a data-dependent meeting-by-meeting approach. Future markets essentially expect EUR short-term rates to remain unchanged till the end of the year and assign only a moderate probability of one 25bp cut in the course of 2026. At the BoE, Chief Economist Huw Pill and external member Megan Greene urged a slower pace of easing to prevent inflation persistence near 4%, highlighting divisions within the MPC over the future rate path. Future market price only a 40% probability of another 25bp rate cut this year.

Credit markets firmed last week as spreads tightened and yields drifted lower, shrugging off concerns around two U.S. regional banks. Zions Bancorporation and Western Alliance Bancorp disclosed losses linked to loans to a California commercial mortgage borrower accused of fraud. Markets largely view these as idiosyncratic events, given the fraudulent nature. Most regional banks remain well-capitalized.

Meanwhile, large U.S. banks delivered another strong earnings, surpassing expectations thanks to trading income and a rebound in M&A activity. Both JP Morgan and Morgan Stanley new dollar bond issues were oversubscribed, and bond prices trade higher in the secondary market.

What JPMorgan CEO Jamie Dimon meant "when you see one cockroach, there are probably more" may refer to his bank's exposure to subprime auto lender Tricolor. 

In Europe, there is no indication of bank exposure to the bankruptcies of U.S. auto-parts supplier First Brands or Tricolor.

The Swiss Federal Administrative Court ruled that the 2023 write-down of Credit Suisse’s AT1 bonds was unlawful, concluding that the contractual trigger (the Viability Event) had not been met, as Credit Suisse remained adequately capitalised at the time. The court revoked Swiss regulator FINMA’s decree, and FINMA will appeal to the Federal Supreme Court.

S&P’s downgrade of France to A+ with a Stable Outlook should not automatically lead to rating downgrades on major French banks, unless a material deterioration in macro conditions.

Across credit markets, investment-grade segments advanced moderately, with the Vanguard USD Corporate Bond ETF up +0.2% and the iShares Core Euro IG Corporate Bond ETF gaining +0.3%, supported by declining U.S. Treasury and German Bund yields. High-yield segments also rebounded, recouping much of the prior week’s losses: USD high yield rose 0.9%, and EUR high yield gained 0.7%, led by tighter U.S. spreads.

Looking ahead, market volatility may increase, but lower sovereign yields would support quality credits - short-duration and investment-grade bonds.