The pace of monetary tightening from major central banks is clearly decelerating, and rate hikes look likely to peter out almost completely by the early autumn, helping reduce overall policy uncertainty. Following a pause in June, the Federal Reserve looks likely move to the sidelines after delivering a final quarter-point increase at its July meeting, bringing rates to a 5.50-percent terminal level. The European Central Bank looks likely to follow a similar (but lagged) trajectory, with two half-point moves in July and September, followed by a shift onto a data-contingent footing. Investors currently have the Bank of England priced to push its base rate all the way to 6 percent by late autumn, but we think this belief looks overegged, and suspect the rate will top out closer to the 5.5-percent mark. And – although rate cuts could come in several emerging markets before the end of the year – markets don’t see any major industrialized economy following suit until early in 2024.

Reflecting this backdrop – and notwithstanding a short-lived surge around June’s US labour market releases – trading ranges in interest-rate futures have tumbled sharply from their peaks. Implied volatility has fallen dramatically across financial markets, with the closely-watched VIX index plumbing levels last seen before the pandemic hit in 2020.

Volatility indices, z-scores, January 2000 – July 2023