Interest rates expectations are becoming more hawkish. This shift is due to stronger-than-expected Non-Farm Payrolls (NFP) and central banks showing less willingness to ease policies. Most central banks are holding back and waiting for more economic data this summer before making decisions. The Federal Reserve predicts a 46 basis point change with a 99% chance of no adjustment in its next meeting. The European Central Bank expects a 25 basis point shift, with an 87% chance of keeping rates steady. The Bank of England forecasts a 40 basis point change, with a 94% likelihood of maintaining its position. The Bank of Canada sees a forecast of 27 basis points, with a 78% chance of no changes. The Reserve Bank of Australia anticipates a 71 basis point change, with a 77% chance of a rate cut. The Reserve Bank of New Zealand is expecting a 29 basis point change, with a 69% chance of no adjustments. The Swiss National Bank forecasts a 46 basis point move, with a 73% probability of a rate cut, potentially going as high as a 50 basis point cut. By year-end, the Bank of Japan expects a 17 basis point change, with a 99% chance of keeping its current rate. Central banks globally are moving away from dovish signals. Strong non-farm payroll numbers show a solid macro environment. This, along with central banks hesitating to ease up, has led market participants to rethink their expectations for rate cuts. This is no longer just a theory; it’s reflected in interest rate futures. Powell’s current view shows a hold on rates in the near term. Short-term U.S. rates signal a much lower chance of cuts soon. The numbers are clear: 46 basis points suggest some movement later in the year, but for now, traders have scaled back their earlier hopes for easing. This creates a stronger base for the dollar’s funding costs, keeping USD carry and swap positions stable for now. Lagarde’s team is still planning one small decrease this year, but euro traders are already reacting to slower-than-expected data improvements. With an 87% chance of no change soon, any shifts will need a significant change in core CPI or a serious downturn in growth data. Otherwise, rates in the eurozone will remain unchanged. In the short-term EUR rates, spreads are tightening, indicating less expectation for aggressive adjustments this cycle. Bailey’s outlook is balanced—neither too strict nor fully leaning towards relief. With a 40 basis point change expected and a 94% chance of no action in the next meeting, market pricing suggests June and July data will be crucial for any shift. We believe focus should remain on wage growth and services inflation. Any persistence in these areas could cause significant movement in longer gilts and short sterling contracts. Consider reducing exposure in sensitive instruments anticipating rate changes. Macklem’s projections, which suggest a 27 basis point change and a 78% chance of holding the current rate, reflect a cautious approach from Ottawa. Canada’s growth outlook has softened, yet inflation remains tough in core metrics. Positions in CAD OIS could find more relative value against more active central banks, especially in cross-duration trades. Bullock’s forecast shows a 71 basis point expectation, reflecting speculation about a future easing. Although there’s 77% confidence in a rate cut, the data hasn’t consistently justified such a strong belief yet. Traders involved in AUD-linked instruments should be cautious of mispricing around quarterly CPI releases, as the market may quickly reverse some of the pro-cut expectations. Orr’s outlook involves just under 30 basis points, assuming a 69% chance of maintaining current rates. There could be a dovish shift if house prices drop more or if retail demand weakens significantly. But at the moment, swaps indicate the RBNZ will likely wait. In the two-year swap market, upward pressure could build if short-term cuts are delayed until 2025. There is potential for curve adjustments that may be underestimated. At Jordan’s institution, the Swiss franc is seen as both a low-yielder and a defensive asset. With a 46 basis point forecast and a 73% chance of a cut, the market anticipates easing soon. However, implied CHF volatility hasn’t matched the expected probability, likely due to historical caution from the SNB. This could open opportunities for short CHF trades if rate decisions begin to align more closely with upper market forecasts, as rate differentials are crucial for carry. Ueda’s strategy is different. A modest 17 basis point change by year-end, with a strong likelihood of steady policy, suggests remarkable patience. Traders here generally focus more on yield curve control and outright JGB buying than on rate expectations. Any changes are more likely to be technical rather than direct rate shifts. Attention should be on any modifications to purchases or policy bands. The yen’s sensitivity to U.S. rate adjustments is significant and needs careful monitoring. Given this wide range of interest rate scenarios, trades that capitalize on differing monetary policies are becoming more appealing. The compression in central bank expectations hints at possibly strong reactions when data surprises, either positively or negatively. We recommend maintaining options overlays to ensure flexibility for sudden adjustments.

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