Julius Baer Sees Final US Rate Hike in December Amid Cooling Labor Market
Julius Baer forecasts a final US rate hike in December before a prolonged pause, while noting Swiss inflation trends and mounting fiscal pressures in France impacting European bond markets.
The US labor market is cooling, inflation is moderating, and financial conditions are tightening, reducing the urgency for the Federal Reserve to maintain an aggressive monetary policy, according to a report by Julius Baer that also examines developments in Switzerland and Europe, alongside bond market risks.
US Monetary Policy and Bond Yields
According to David Kohl, Chief Economist at Julius Baer, US job growth slowed in September, with fewer than half of industries reporting an increase in employment. At the same time, the unemployment rate and labor market slack have risen. Alongside a moderation in the PCE inflation index, rising long-term yields and a strengthening dollar are contributing to tighter financial conditions.
Consequently, Julius Baer expects one final 25-basis-point rate hike at the Federal Reserve's December meeting, followed by an extended pause. According to the forecast, the Fed is expected to cut rates back to a range of 3.75%-4.00% by December 2027. Meanwhile, the yield on 10-year US Treasury bonds is expected to decline gradually over the next 12 months, targeting 5.05% in three months and 4.55% in 12 months.
"The cooling labor market and tightening financial conditions reduce the urgency for further aggressive tightening by the Federal Reserve," noted David Kohl.
Swiss Inflation and SNB Outlook
Developments in Swiss inflation are also in focus. Sophie Altermatt, an economist at Julius Baer, notes that energy and fuel prices pushed the country's annual inflation up to 1.0% in September, compared to 0.8% in August. However, core inflation remained moderate at 0.3%, leading expectations that the Swiss National Bank (SNB) will continue to hold steady.
The SNB projects average inflation of 1.2% in the fourth quarter of 2026 and the first quarter of 2027, before easing to 0.7% in the fourth quarter of 2027. Julius Baer's baseline scenario is that the central bank will keep interest rates unchanged while awaiting clear evidence of broader price pressures. According to the forecast, the pause could last until September 2027, with a rate hike anticipated only in the second half of 2027, contrary to current market pricing that implies a 30% probability of a hike as early as December 2026.
European Bond Markets and France
In Europe, developments in France continue to weigh heavily on the bond market. Dario Messi, Head of Fixed Income Research, and Afonso Borges, a fixed-income researcher at Julius Baer, note that persistent deficits and political deadlock in France have led to a sharp widening of the yield spread between French and German government bonds.
The spread reached 145 basis points, an increase of about 60 basis points since the beginning of September. Pressure in the French bond market has begun to spill over moderately to peripheral European bonds, European banks, and the euro.
However, Julius Baer points out that the long average maturity of French debt helps slow the pace at which higher interest costs are rolled over. Should pressures intensify and spread to broader markets, the European Central Bank's (ECB) backstop mechanism remains available for intervention.
From an investment perspective, Julius Baer favors euro-denominated investment-grade corporate bonds, which are considered less exposed to French fiscal risk. At the same time, the investment house maintains an optimistic outlook on European peripheral government bonds.
