Most central bankers were on holiday last week, but there was some Fed-related news, dominated by policy debate and political noise. Minutes from the December FOMC highlighted a finely balanced decision, reinforcing expectations that rates will be held steady at the January meeting, with futures pricing only a 15% probability of a cut. While most officials still see scope for further easing if inflation continues to moderate, divisions remain over timing and magnitude, reflecting differing assessments of inflation versus labor-market risks. The December 9–3 vote to cut rates underscored these splits, with projections for 2026 ranging widely despite a median view of one further cut. Chair Powell argued policy is now restrictive enough to cool inflation while supporting employment. Separately, President Trump said he will announce Powell’s replacement “sometime in January,” with markets focused on potential implications for Fed independence ahead of the US Supreme Court hearing on Lisa Cook scheduled for January 21^st.

ECB news was lighter on policy signals, with President Lagarde welcoming Bulgaria as the euro area’s 21st member, framing enlargement as a sign of European resilience amid geopolitical uncertainty. The comments were more symbolic than market-moving, offering little guidance on the near-term policy outlook.

BoJ minutes revealed growing concern about the persistence of very accommodative policy. Several board members highlighted that Japan’s real interest rate remains deeply negative and among the lowest globally, with some arguing that gradual rate hikes every few months may be appropriate to curb future inflation pressures and move policy closer to neutral.

Market pricing of monetary policy changes in 2026 did not significantly move last week. For the Fed, future markets currently price at least two 25bp cuts by the end of the year (one by June, the second by September), and a 40% chance of a third one. For the ECB, no change in rate is currently priced for 2026. For the BoE, future markets price one 25bp rate cut by June, and a 65% chance of a second one in the second half of the year. The SNB is expected to keep its key rate unchanged at 0% throughout 2026. And future markets price one 25bp rate hike by the BoJ before the end of the summer, and a 66% chance of a second rate hike by the end of 2026.

Credit

Credit markets delivered a mixed performance in a shortened trading week, with spread dynamics diverging between the U.S. and Europe. U.S. investment grade and high yield spreads were broadly unchanged, while European credit spreads widened moderately. In total return terms, investment grade marginally underperformed high yield, reflecting curve steepening in both U.S. Treasuries and German Bunds.

Over the weekend, American Airlines and Delta Air Lines began canceling flights to Caribbean destinations early Saturday in compliance with an overnight mandate from the Federal Aviation Administration (FAA). Caribbean airspace reopened shortly thereafter, prompting American Airlines to add approximately 5,000 seats to restore capacity. American Airlines’ 3-year CDS tightened further on improved investor sentiment. Prior to the disruption, American Airlines expects the business and premium travel demand to remain a bright spot into the first quarter of 2026.

Overall, credit fundamentals remain stable, and the continued resilience of high yield suggests that investors remain comfortable with below-trend default expectations, despite ongoing rate volatility.

Global banks are well positioned to benefit from a recalibration of capital requirements and expected pickup in M&A activity.

Heavy issuance expected in January is likely to be well absorbed, supported by strong investor demand. A higher-for-longer rate environment, coupled with the absence of further rate-hike expectations, bodes well for credit markets.