Global markets are entering a critical phase as traders prepare for upcoming central bank decisions from the Reserve Bank of Australia and the US Federal Reserve’s FOMC.
With inflation trends diverging and growth momentum uneven across major economies, investors are watching these meetings closely for signals that could influence currencies, bonds and broader risk assets.
After holding the cash rate at 3.6 per cent, the RBA has warned that inflation remains “sticky”, particularly in services and domestic demand. While temporary factors pushed headline inflation higher, underlying pressures have yet to ease meaningfully.
Markets are not pricing in a rate cut on December 9, as many analysts now expect the RBA to maintain a tightening bias until there is clearer evidence that inflation is returning sustainably to the 2–3 per cent target band.
MFS Investment Management said recent inflation and activity data, including GDP and credit growth, have generally been on the stronger side, challenging the RBA’s view that policy remains only mildly restrictive.
“We expect the RBA to stay on hold at the December meeting but express openness to a rate hike should the economy strengthen materially from here,” fixed income research analyst Carl Ang said.
“The base case remains for a prolonged hold by the RBA as the labour market gradually softens. However, the balance of risks are clearly tilting towards a rate hike, likely sometime in the second half of 2026 at the earliest.”
Andrew Canobi, Director at Franklin Templeton Fixed Income, said a growing chorus is calling for the RBA to shift course and begin lifting rates as year end approaches.
“Just weeks ago, sentiment looked completely different,” he added. “As recently as October, the bond market had fully priced in two 25-basis-point cuts by March 2026.
“But last week’s first comprehensive monthly CPI print was a line in the sand, and it effectively ended the market’s conviction that further easing is coming soon.”
Canobi noted the sharp divergence in market reactions on the day of the CPI release.
“Bonds threw in the towel on cuts immediately. Equities didn’t blink and rallied about 0.8 per cent on the day. Large-cap Australian shares are still only around 5 per cent below record highs. If the economy truly needed multiple rate cuts to stay afloat, you wouldn’t know it from broad financial indicators like equities and real estate.”
“Housing is reinforcing that message. House prices, our national obsession and a key barometer of household wealth, keep climbing. National prices rose another 1 per cent in November, even with Melbourne still under pressure. Housing is arguably the most interest-rate-sensitive asset in the country, and these trends don’t suggest policy is overly tight.”
The deeper challenge lies in inflation’s persistence relative to the RBA’s expectations, according to Canobi
“Inflation simply isn’t moving the way the RBA anticipated. The RBA already revised its forecast in November, lifting the projected core CPI track to around 3.2 per cent by end-2025 after a stronger-than-expected Q3 result. But the latest monthly core CPI keeps pushing higher.
“The three-month annualised core run-rate is now about 3.6 per cent – well above even the revised projection. The run-rate is blowing the RBA’s forecasts out of the water.”
Franklin Templeton’s base case had previously assumed only a modest easing cycle.
“We have long argued that any cut cycle would be shallow, with terminal rates still starting with a ‘3’ rather than a ‘2’,” Canobi said. “But the strength in key indicators since mid-year has surprised us.
“For transparency, we didn’t think the RBA would be facing the prospect of hikes in 2026, yet that now looks increasingly plausible.
“Looking back, the market may have been too optimistic about policy easing next year. In hindsight, three 25-basis-point cuts in 2025 is starting to look aggressive.”
Meanwhile, the Federal Reserve’s December 9–10 meeting is shaping up to be one of the most consequential in months.
“Economists are now expecting a 25-basis-point rate cut, reflecting cooling labour market indicators and easing inflation pressures.”
The last major data release ahead of the meeting will be Friday’s US PCE price index, a key inflation gauge.
MFS Investment Management said the market is priced for a 25-bp cut on December 10th.
In a note to InvestorDaily, Erik Weisman, chief economist & portfolio manager, and Kish Pathak, fixed income research analyst, said the main reason to agree with this confident market pricing is that the Fed generally tries to avoid surprising investors.
“And yet, sometimes surprises do happen. At the October FOMC meeting, very much contrary to expectations, Chair Powell pushed back against market pricing of a cut in December, suggesting the FOMC is divided. He highlighted the data fog created by the shutdown to declare that a December cut was far from a foregone conclusion,” they said.
The pair believe Fed communications since then have revealed a widening split within the committee.
“Hawkish October FOMC minutes further bolstered the no-cut camp. It became clear from the minutes that the October risk-management cut was a close call even for the folks who supported the move.”
“In terms of recent macro data, the September payrolls, while dated, do not support the case for a December cut. Nonfarm payrolls gained about 100,000 in September, and while the unemployment rate edged up to 4.4 per cent, it was due to a pickup in the labour force participation rate.
“Broadly speaking, the dearth of data from October and November will remain in place until well after the December FOMC meeting, with the next set of labour data and CPI prints due on December 16 and 18, respectively.”
Chief global economist at PGIM Fixed Income, Daleep Singh, said although the upcoming Fed decision has been clouded by the recent government shutdown and the resulting data gaps, market pricing has firmed around a rate cut next week.
“However, we’re expecting a ‘hawkish cut’ that could be reflected by a non-unanimous decision and further dispersion across the dot plot in the summary of economic projections. That said, we continue to see the policy rate heading to neutral (3.0–3.25 per cent) by the end of Chair Powell’s term in May.”
“Another Fed-related point pertains to the market pricing after May 2026 – which is only indicating one additional 25 bp rate cut into the sub-3.0 per cent area, particularly with Kevin Hassett, Director of the National Economic Council, emerging as the frontrunner for the next Fed chair.
“A scenario where Hassett becomes Fed Chair and follows the administration’s desire for more accommodative monetary policy increases the probability of the Fed funds rate heading towards 2.0–2.5 per cent by the end of 2026.”
