CIO Weekly: Seeing the Rate Hikes Through the Holds

Don't mistake recent rate holds by major central banks for an end to tightening. Inflation remains sticky, and expect hikes from the Fed, ECB, and BoJ in December. The Fed's decision was complicated by strong economic data and inflation prints, leading to dissents and a market expectation for further increases.

The tone from Fed Chair Warsh's press conference was more dovish than anticipated, suggesting a data-dependent approach and a desire to see financial conditions tighten further. We still anticipate a 25 basis point hike in December, but the neutral rate is seen around 4.00-4.25%. A tail risk of more hikes exists if energy prices stay elevated and impact core inflation.

Meanwhile, the ECB and BoJ are less able to afford patience. Both face rising inflation, with Japan's inflation reaching the BoJ's 2% target. The ECB's decision is more complex due to energy costs and leadership transition uncertainty. We see synchronized, but short, tightening cycles globally. Our portfolio positioning reflects this, favoring duration in the U.S. and selectively in Europe, anticipating yield declines on signs of risk aversion.