The Fed Has Rarely Been So Divided Over Its Long-Term Plan for Interest Rates

Economic

Central Bank

Summary:

The Fed is increasingly divided over the “neutral” interest rate as officials debate how far to cut amid mixed economic risks. Diverging r-star estimates complicate policy, leaving data—not theory—to guide decisions.

After cutting interest rates by more than a percentage point, Federal Reserve officials are now wondering where to stop – and finding there’s more disagreement than ever.

In the past year or so, prescriptions for where rates should end up have diverged by the most since at least 2012, when US central bankers started publishing their estimates. That’s feeding into an unusually public split over whether to deliver another cut next week, and what comes after that.

Fed Chair Jerome Powell has acknowledged “strongly differing views” across the rate-setting committee about which of their two goals – stable prices and maximum employment – to prioritize. It boils down to a question of whether the economy needs a touch more gas to shore up job markets, or whether policymakers should take their foot off the pedal because inflation is above-target and tariffs could push it higher still.

But that raises another question — one that’s more abstract but increasingly important to the whole debate: what rate of interest would neither stimulate the economy nor squeeze it? This is the presumed endpoint of the cutting cycle. It’s known as the “neutral” rate. And right now the collective Fed is struggling to figure out what it is.

‘All Over the Place’

In September, the last time they published projections, 19 officials came up with 11 different estimates, ranging from 2.6% to 3.9% — the latter number being roughly where rates are now.

“We have people all over the place,” says Stephen Stanley, chief US economist for Santander. “There’s always a degree of disagreement on that, but the current range is wider.”

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Stanley also thinks the estimates are becoming more important, as the Fed’s benchmark arrives at the upper edge of that range. “It starts to become potentially a binding constraint for some of the more hawkish Fed members,” he says. “It definitely means that each successive cut becomes harder and harder.”

All of this is borne out in some recent Fedspeak. Philadelphia Fed President Anna Paulson explained on Nov. 20 why the twin risks of higher inflation and unemployment, combined with rates that may already be near neutral, have left her heading into the December meeting with caution.

“Monetary policy has to walk a fine line,” she said. “Each rate cut brings us closer to the level where policy flips from restraining activity a bit to the place where it starts to provide a boost.”

The neutral rate of interest is also known as r-star, based on the mathematical notation used to represent it in models, or the natural rate. It can’t be directly observed, only inferred, and has generated intense debate for more than a century. Some economists, including John Maynard Keynes, have questioned whether it’s really a useful tool at all — but few modern central bankers would agree.

The idea is at the “heart of monetary theory and practice,” according to New York Fed chief John Williams, a specialist on the topic. He’s argued that failure on the part of policymakers to diagnose shifts in the natural or neutral rates of interest and unemployment can have profound consequences, citing the spike in inflation expectations in the 1960s and ‘70s.

The neutral rates are widely seen as driven by long-term shifts in things like demographics, technology, productivity and debt burdens, which affect patterns of savings and investment.

Which Direction?

At the Fed, alongside the lack of consensus on where they are right now, there’s also disagreement about which way they’re headed.

Minneapolis Fed President Neel Kashkari predicts that widespread adoption of artificial intelligence will lead to faster productivity growth, pushing the neutral interest rate up as new investment opportunities boost demand for capital.

Fed Governor Stephen Miran, President Donald Trump’s latest appointment to the central bank, says present-day policies should also play a part in the debate. In his first policy speech after joining the Fed, Miran made the case that Trump’s tariffs, immigration curbs and tax cuts have combined to drive the neutral rate lower, even if only temporarily — so the Fed should ease policy sharply to avoid hurting the economy.

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Williams last month expressed doubts about allowing short-term changes into the calculation. He argues that global trends such as aging populations are holding estimates of the rate at historically low levels.

For a decade or so before the pandemic, when inflation was subdued and interest rates near zero, policymakers seemed to more or less agree where neutral was. But the surge in prices since then – as well as the uncertainty over trade and immigration, and what AI will do to the economy — have left some analysts wondering if diverging estimates are the new normal.

What’s more, the Fed is set for a change of leadership in 2026, with Trump vowing to pick a new chair who’s committed to lower interest rates, and the president may have other opportunities to staff the central bank with his allies. The new policymakers are expected to argue for cheaper money, like Miran has, and may also estimate that neutral is lower right now.

‘Only a Tool’

Since the neutral rate of interest is for economists what “dark matter” is to astronomers — something that can’t be seen directly — there are policymakers who prefer to judge it, in Powell’s words, “by its works.”

St. Louis Fed President Alberto Musalem says low default rates show financial conditions remain supportive for the economy. His Cleveland Fed counterpart, Beth Hammack, says narrow credit spreads imply monetary policy is “only barely restrictive, if at all.”

Drawing clues from financial markets, though, isn’t a straightforward task. Some Fed officials see the yield on 10-year Treasury bonds (^TNX), which has been hovering around 4%, as evidence that financial conditions aren’t holding the economy back. Others say that those measures reflect expectations about the economy’s path, as well as strong global demand for safe assets, meaning they’re of little use when trying to estimate neutral rates.

With so much uncertainty around the outlook, divisions over the neutral rate aren’t likely to disappear when Fed officials reveal their latest estimates next week.

Meanwhile, it’ll be more concrete things – “the labor data and the price data” — that drive actual policy calls, according to Patrick Harker, who headed the Philadelphia Fed until he retired this year.

The neutral rate is “a useful conceptual tool, but it’s only a tool. It doesn’t drive policy decisions,” Harker says. “I don’t ever remember a case where everybody sat around and the entire conversation was, what is r-star?”

Source: Bloomberg

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Justin

Economic

On Tuesday, the Organization for Economic Co-operation and Development (OECD) announced that global GDP is holding up better than expected, as a rise in artificial intelligence investment helps mitigate the impact of U.S. tariff hikes.

The OECD warned that this resilience is still brittle and that any renewed trade disputes or unfulfilled AI aspirations could jeopardize the future.

In the OECD Economic Outlook, the organization estimated that global growth would decline moderately from 3.2% in 2025 to 2.9% in 2026, leaving its forecasts unchanged from those in its prior estimates in September. The OECD projected that global growth would recover to 3.1% in 2027.

OECD projects global growth amid tariff challenges

OECD forecasts that near-term activity will decrease as higher effective tariff rates progressively feed through, weighing on investment and trade, amid continued geopolitical and economic uncertainty. The organization claimed that growth is likely to firm again later in 2026 as the impact of tariffs fades, financial conditions recover, and lower inflation stimulates consumption, with rising Asian economies being the leading drivers of global growth.

According to OECD, the U.S. economy is expected to fall from 2.8% in 2024 to 1.8% in 2025 and then drop to 1.7% in 2026. In 2027, the U.S. economy is projected to be at 1.9%

The OECD said that AI investment, fiscal support, and predicted Federal Reserve rate cuts are helping counter the drag from tariffs on imported products, lower immigration, and federal employment cutbacks.

The Paris-based organization revised its prediction for the euro zone's 2025 growth to 1.3% from 1.2%, underpinned by strong labor markets and increasing public investment in Germany. According to the organization, growth is expected to slow to 1.2% in 2026, down from 1% previously due to financial constraints in France and Italy.

According to the OECD Economic Outlook, China's growth is forecast to remain stable at 5% in 2025, up from 4.9% in the previous forecast. The organization expects China's growth to drop to 4.4% in 2026, unchanged from the last outlook, as fiscal assistance expires and new U.S. tariffs on products imported from China take effect.

Japan's GDP is predicted to rise 1.3% in 2025, up from 1.1%, driven by strong corporate earnings and investment, before dropping to 0.9% in 2026.

OECD warns of persistent global inflation risks

The Paris-based organization said that inflation is forecast to drop in most G20 economies as economic growth moderates and labor market pressures ease. The OECD stated that headline inflation remains sticky in some locations but is predicted to return to its goal by 2027 in almost all major economies.

According to the International Economic Organization, global trade growth is predicted to decrease from 4.2% in 2025 to 2.3% in 2026 as the full effects of tariffs weigh on investment and consumption.

The OECD Economic Outlook revealed that most major economies are expected to return to their inflation targets set by central banks by mid-2027. In the U.S., inflation is expected to peak in mid-2026, following a period of tariff pass-through, and then decline.

In China and certain emerging countries, inflation is predicted to rise gradually as excess production capacity is eliminated.

The Paris-based organization stated that countries need to discover ways of participating cooperatively within the global trading system. Additionally, the organization stated that countries need to work together to make trade policy more predictable and secure a lasting resolution to trade disputes.

According to OECD, most major central banks are likely to hold or cut borrowing prices during the coming year as inflation pressures recede. The Federal Reserve is expected to lower rates somewhat by the end of 2026, barring any inflation surprises from tariffs.

The international economic organization said that central banks should remain sensitive to fluctuations in inflation dynamics. The financial watchdog further claimed that steady policy rate reductions can continue if underlying inflation continues to decline and expectations remain anchored.

The OECD warned that countries experiencing tariff-driven price pressures may need to be more cautious, adjusting the pace of interest-rate cuts to avoid reigniting inflation.

Source: CryptoSlate

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Justin

Political

From a control tower overlooking a muddy field in central Estonia, Maido Ruusmann and a pair of local investors watched as a meter-long spy drone was launched into the air using a giant elastic band. It climbed to a height of a kilometer and traced circles in the sky, sending data and images back to about a dozen people huddled around monitors on the ground below.

Ruusmann, a member of parliament from the southern part of the country, organized the demonstration less for national security reasons than for local economic ones. Like many rural areas, his hometown of Tõrva has seen its population decline over the years. Ruusmann was hoping that if the investors were to reach a deal with Skyassist, the Ukrainian defense company that manufactures the drone, they would set up a production facility in his region.

"We need to be salesmen for our town. All local governments have to compete for people and investment," he said later by phone. "The defense and drone industry is the industry of the future."

Estonia's relationship with its eastern neighbor and former occupier is tense. Russia took years to remove its troops after Estonia regained its independence in 1991. And as Russian President Vladimir Putin has become more aggressive about reclaiming his country's former territories, Estonia has been vocal about the threat posed by Moscow.

Since 2022, the year Russia launched its full-scale invasion of Ukraine, Estonia has hiked taxes, cut public spending and increased borrowing to triple its defense budget from €776 million ($897 million) to €2.4 billion in 2026. Military spending next year will translate to over 5% of the nation's gross domestic product, the highest in Europe. Though widely seen as necessary, that spending — most of which has gone towards foreign weapon systems such as US-made HIMARS rocket launchers — is also a burden. It comes in the wake of a multi-year recession, and as Estonia struggles with the euro area's highest rate of inflation.

Estonia's Defense Ministry is now focused on keeping more of that money in the country by channeling it into a domestic defense sector. Leveraging Estonia's status as a globally competitive startup hub, Tallinn announced in January that it would set aside €100 million to launch one of Europe's first funds explicitly focused on weapons.

That has supercharged a growing ecosystem of local defense startups, many of which were founded by Ukrainians or use that country's battlefields to test out their products. With governments across the EU beefing up their defense budgets — Germany alone has committed to spending more than €500 billion on defense between 2026 and 2029 — the hope is that Estonian companies will eventually draw international investment.

Tõrva is a bucolic lakeside town of 2,600 people that comes alive during the summer, when tourists arrive to enjoy its saunas and annual Fire Festival. While those months are crucial for the region's economy, average incomes remain among the lowest in the country. The biggest industries have long been agriculture and timber, and the largest employer is a woodworking factory.

The question of how to reinvigorate Tõrva's economy was on Ruusmann's mind last July when he was approached at the Fire Festival by a Skyassist representative. The dronemaker's Kyiv plant had recently been hit in a Russian air strike, but even before that, the company was looking to expand its manufacturing footprint in Europe.

"Unfortunately, there are no completely safe places in Ukraine today," said Skyassist's chief executive officer Igor Krynychko, who had only a few days earlier touted his product in neighboring Latvia.

At the time, Ruusmann, Tõrva's former mayor, was working with officials from neighboring towns to find tenants for a proposed €10 million industrial park that they hoped would become an economic hub for the region. Ruusmann, who has made several trips to Ukraine, most recently to deliver generators as part of a political delegation, had been wondering whether defense companies might be a good option.

"It was an interesting coincidence, because it's exactly what we had been talking about," he said.

Defense is a relatively new industry in Estonia, as the private sector wasn't allowed to manufacture weapons domestically until 2018. "If you went to a bank five years ago to talk about making lethal weapons, they would send you away immediately," said Jens Haug, who is on the management team for Nitrotol, an Estonian maker of explosives. That changed after a lobbying push.

"They are much more accommodating now," Haug noted.

The sector has grown quickly — there are around 200 companies in the defense industry association, including dronemaker Threod and unmanned vehicles builder Milrem — and sales by Estonian defense companies rose from €245 million in 2022 to €500 million in 2024. The amount of defense-linked government spending going into the Estonian economy is also increasing. In 2023, it was €395 million; in 2024, it was €489 million.

Estonia's size and newness to the sector, however, pose challenges. European governments typically purchase weapons from US manufacturers or their own domestic defense giants. While larger nations can keep tax revenues within their borders through deals with homegrown companies, Estonia is simply too small a market to adopt that model.

"The defense industry here needs to be international by its nature," said Nele Loorents, a research fellow at the International Center for Defence and Security in Tallinn.

Estonia is also treading carefully when it comes to partnerships with foreign defense giants. Military procurement cycles can last for years, with bad decisions having expensive and long-lasting consequences. Estonian officials learned that the hard way in the 1990s, when its first major weapons purchase from a state-owned Israeli company delivered dated artillery and guns that didn't work. (Some issues were eventually resolved, and the deal was later viewed more positively.)

Tallinn recently declined an offer from the German defense group Rheinmetall to build a new ammunition plant in the country on the grounds that, according to the Defense Ministry, the terms weren't favorable enough. Rheinmetall did not respond to a request for comment, but similar projects are moving ahead in Lithuania and Latvia.

One advantage Estonia does have is that its defense officials can be nimble when needed. As Russia's war in Ukraine escalated, it quickly became clear that Europe lacked production capacity for artillery shells. Estonia, which wasn't making any shells at the time, took this as a mandate. The government is now finalizing a deal with an artillery ammo manufacturer.

"From a national security standpoint, if you have production capacity in the country, you can use that for your own needs in a crisis situation," said Indrek Sirp, special advisor for defense industry development at the Ministry of Defense.

For the last two years, Sirp has been busy scouting sites that could host industrial parks for arms manufacturers. In April, the government selected two locations: one in Ermistu, in southwestern Estonia; the other in Põhja-Kiviõli, in the northeast of the country. Tallinn plans to spend about €50 million on infrastructure before missiles and explosives companies move in, and he anticipates they will need to put in another €200 to €300 million. In November, citing market interest, Sirp said the government would look into creating two additional industrial parks.

Despite broad public support for bulking up Estonia's defenses, however, some of these efforts have run into red tape and community resistance. In Ermistu, three local nonprofits and dozens of individuals filed a lawsuit to halt development on the industrial park, accusing the government of ignoring environmental and noise considerations. That worries some in the defense sector, who say that legal and bureaucratic obstacles to arms production could slow things down at a critical moment.

"We haven't moved fast enough," said Kalev Stoicescu, chair of the Estonian parliament's national defense committee. "What we initially wanted to do in four-to-eight years, we now need to do in one-to-three years because we don't know how the international security situation will develop."

For Ukrainian arms manufacturers accustomed to working at the speed of war, adapting to their new context may also be an adjustment.

"The main challenge is the excessive bureaucracy of the European market," said Krynychko, Skyassist's CEO. "Sometimes we see that some of the requirements of European licensing systems do not quite correspond to the requirements of real combat."

Source: Bloomberg Europe

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Adam

Stocks

Investors received another vote of confidence that stocks will extend their rally next year.

RBC Capital Markets has joined other major firms in setting a bullish year-end price target for 2026, with analysts expecting the benchmark S&P 500 (^GSPC) to hit 7,750 by next December. But even as the firm sees continued prominence from the megacap AI winners — despite valuation fears and macroeconomic uncertainty — RBC analysts see a contest playing out between growth and value stocks.

“While we give an edge to value and the broader market over growth and the Mag 7 for now, we think it’s important to keep in mind that this tug of war may not be over yet,” wrote analysts led by Lori Calvasina, head of US equity strategy.

It's a compelling end-of-year projection that shows you can be bullish even if you're not sure which part of the market will be pulling the lion's share of wagon — and a dose of validation for the index fund crowd.

Calvasina wrote that even as this year was defined by the success of the top 10 market cap names, leadership is primed to rotate, in large part thanks to sentiment. AI jitters and concerns surrounding the heavy concentration of the stock market tied to the AI theme are very real.

"While we are not in the AI bubble camp, we don’t think these fears are unfounded," she wrote.

Still, for the rotation into value stocks to take hold, earnings growth dynamics need to shift more clearly in the broader market’s favor.

RBC's target, which approximates the average of several models ranging from 7,200 to nearly 8,000, implies a gain of roughly 13% from current levels. And it echoes other optimistic projections that foresee double-digit-percentage gains by the end of next year.

Last week, HSBC analysts set their 2026 price target at 7,500. Deutsche Bank aimed even higher, registering the most bullish call yet at 8,000 and emphasizing AI excitement.

RBC's shot isn't quite so full-throated, and the bank sees the 2026 growth vs. value tug-of-war being shaped by the same familiar themes that investors have grappled with in 2025, like the labor market, AI, and political risk.

Calvasina and Co. did, however, issue a reminder not to place too much stock in the Fed's meeting-by-meeting machinations when thinking about the markets next year, as time will flatten any by-meeting decisions.

Though markets are pricing in an 85% chance that the central bank will reduce rates next week at the conclusion of its last policy meeting of the year, Calvasina wrote that the decision on the December cut ultimately won't matter too much to the year-ahead target, as long as the other cuts in the consensus forecast come through.

"Historically, when the Fed has made modest cuts in a 12-month period that amount to 1% or less, the S&P 500 has gone up by 13.3% on average during that same time period," she wrote.

A figure certainly in line with her projected 13% gain.

Source: finance.yahoo

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Michelle

Political

Russia-Ukraine Conflict

US negotiations with Russia over a plan to end its war in Ukraine will not make unilateral decisions about NATO's future, Secretary General Mark Rutte said.

Instead, those issue will be settled in another channel, Rutte told reporters in Brussels on Tuesday, ahead of a foreign ministers' meeting on Wednesday.

"When it comes to the NATO elements of a deal to end the war against Ukraine, that will be dealt with separately and that obviously will include NATO," he said. But Rutte declined to confirm whether another forum existed already, only saying he was "closely coordinating" with the US.

Rutte's comments come as a US delegation arrives in Moscow for negotiations over a potential plan to end Russia's war in Ukraine. US envoy Steve Witkoff is scheduled to meet with Russian President Vladimir Putin on Tuesday, following discussions over the weekend between the US and Ukrainian officials.

The US push has forced NATO into existential discussions about its own future. Throughout the talks, Washington has unilaterally floated ideas that would alter the military alliance's foundation — offering to restrict NATO expansion, shift European forces and alter the transatlantic security arrangement.

"There are some items of the peace plan that need to rest with other organizations, including NATO," Canadian Foreign Minister Anita Anand said Tuesday in a Bloomberg TV interview.

NATO allies were hoping to hear from Secretary of State Marco Rubio on Wednesday about the negotiations, according to people familiar with the matter, but the US diplomat is skipping the meeting.

Rutte insisted that he's in "constant contact" with Rubio. "I totally accept him not being able to be here."

Still, NATO leaders are wary that Washington will ignore the military alliance and pressure Ukraine to accept Russia-friendly concessions. They were startled last month when a US-drafted peace plan suggested Ukraine concede Russian-desired territory, cap its military and never join NATO.

Those demands have since been revised or dropped after US discussions with Ukrainian and European officials. On Monday, Ukrainian President Volodymyr Zelenskiy said the latest version "looks better."

Rutte agreed, saying that officials have "moved on" from the early plan and dropped the more contentious proposals.

"You need to start somewhere, you need to have proposals on the table," he said, praising the US effort.

Putin has signaled an openness to the talks, saying the US plan could be "the basis for future agreements," while adding that no final version exists. Yet the Russian leader has given no indication he will roll back demands for territory or NATO constraints.

To address NATO members' anxieties, Rutte called an extraordinary meeting of the alliance's political decision-making body, the North Atlantic Council, where ambassadors aired their fears and got a readout on the negotiations. Concerns included potential territorial concessions and security guarantees for Ukraine, said the people familiar with the matter.

The meeting was also meant to start a discussion about what any peace plan would mean for NATO, the people added, speaking on the condition of anonymity.

Rutte has been in frequent contact with the US and President Donald Trump, according to European diplomats, representing Europe's views. Allies are also being encouraged to keep contributing to a program allowing NATO allies to purchase US-made weapons for Ukraine, the people said.

Separately, Ukrainian Foreign Minister Andrii Sybiha will brief allies on the negotiations on Wednesday.

"In the end we need two to tango," Rutte said. "We also need Russia to tango. That's being tested at the moment."

Source: Bloomberg Europe

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Adam

Commodity

Crude Oil Steadies as Geopolitics and Peace Talks Pull in Opposite Directions

Light crude is drifting lower Tuesday, hovering around the $69.23 level that’s been the midpoint of the two-month range. Buyers aren’t rushing in — but sellers aren’t pressing hard either. The market’s caught between competing headlines, and it shows.

At 10:51 GMT, Light Crude Oil Futures are trading $59.25, down $0.07 or -0.12%.

Supply Risks Keep a Floor Under Prices

Ukrainian drone strikes on Russian energy infrastructure ramped up over the weekend, and the market’s taking notice. The Caspian Pipeline Consortium only just resumed shipments from one mooring point at its Black Sea terminal after a major attack on November 29. Russian-flagged vessels have also been targeted, adding another layer of uncertainty to an already fragile supply picture.

Then there’s Venezuela. Trump’s weekend comments about closing airspace around the South American producer sparked fresh jitters. It’s vague enough to leave traders guessing — but specific enough to matter. Venezuela pumps serious barrels, and any escalation there adds to the geopolitical risk premium that’s been building over the past few sessions.

But Peace Talks Are Capping the Upside

Here’s the other side of the trade. Trump’s envoy Steve Witkoff and Jared Kushner are meeting Putin today to discuss a potential path to ending the war in Ukraine. Kremlin envoy Kirill Dmitriev will also be in the room. Nobody’s expecting a breakthrough — these things drag on — but even the hint of de-escalation raises a question the market doesn’t love: what happens if Russian crude flows freely again?

Analysts at PVM flagged it directly. A peace deal could eventually mean more Russian oil and products hitting the market, even if the process takes time. That’s enough to keep bulls from getting too aggressive, even with supply risks flashing elsewhere.

Traders Eye $69.23 as the Line in the Sand

Daily Light Crude Oil Futures

The technicals are clean. A sustained hold above $69.23 opens the door to the 50-day moving average at $70.06 — a level that’s capped every rally since late October. Punch through there, and the 200-day at $71.08 comes into view. That would be a sign of strength.

On the downside, if buyers can’t defend the midpoint, sellers will likely press toward the 61.8% support at $68.44. Below that, the swing low at $67.10 is the last line before things get messier.

Caught in the Crossfire — What Breaks the Stalemate?

The market wants direction, but it’s not getting it yet. Geopolitical premiums are holding prices up, peace talk hopes are holding them down, and crude is stuck in the middle — literally. Reaction to that $69.23 pivot will set the tone for the day. Traders looking for a decisive move may need to wait for clearer signals from Moscow — or another unexpected headline to tip the balance.

Source: fxempire

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Warren Takunda

Economic

European sovereign bond yields have climbed sharply in recent days, driven by a global market sell-off sparked by rising Japanese yields, even as eurozone inflation shows little sign of accelerating.

According to flash estimates from Eurostat on Tuesday, eurozone annual inflation reached 2.2% in November, a modest uptick from 2.1% in October, and broadly in line with analysts’ expectations.

Despite the increase, month-over-month prices contracted by 0.3%, marking the first monthly decline since January and suggesting that disinflation pressures are still present.

Core inflation, which strips out volatile components such as energy and food, held steady at 2.4%, slightly below economists' forecasts of 2.5%. Services continued to be the main driver of inflation at 3.5%, followed by food, alcohol, and tobacco at 2.5%. Energy prices, meanwhile, remained a drag, falling 0.5% compared with a 0.9% drop in October.

Among member states, Estonia posted the highest annual inflation in November at 4.7%, followed by Croatia at 4.3%. In contrast, Cyprus and France saw only marginal year-on-year increases in consumer prices, at 0.2% and 0.8% respectively.

On a monthly basis, inflation rose most in Lithuania, up 0.4%, while several countries experienced declines. Malta recorded the sharpest drop, with prices falling 3.3%, followed by the Netherlands with a 1.4% decrease.

“The headline number continues to hover close to the European Central Bank’s 2% target, but the underlying picture remains uneven,” said Professor Joe Nellis, economic adviser at MHA.

“The disinflation trend is intact but fragile, and services-led pressures remain persistent.”

Separate data on Tuesday showed the eurozone’s seasonally adjusted unemployment rate at 6.4% in October, unchanged from September and slightly above expectations.

Youth unemployment remained elevated at 14.8%.

Among major economies, Spain led with the highest unemployment rate at 10.5%, followed by France at 7.7% and Italy at 6%, while Germany (3.8%) and the Netherlands (4%) had the lowest rates.

Compared with October 2024, the bloc’s jobless rate ticked up from 6.3%.

Japan triggers global bond repricing

Despite the largely benign inflation outlook and subdued economic activity in the eurozone, bond yields have surged in recent sessions. The primary catalyst: expectations of monetary tightening in Japan.

On Monday, Japan’s 10-year government bond yield jumped to a 19-year high before stabilising around 1.86% on Tuesday. The sharp move followed hawkish comments from Bank of Japan Governor Kazuo Ueda, who said the central bank would “weigh the pros and cons” of a rate hike and act “as appropriate”.

Market pricing now implies an 80% probability of a rate increase at the BoJ’s December 19 meeting, with even higher odds for January.

Strategists at BBVA said Ueda’s remarks signalled a recalibration rather than a full policy shift, noting that “real rates would remain deeply negative” .

German 30-year bond yields rose six basis points on Monday to 3.40%, nearing highs last seen in early September, which were the strongest levels since mid-2011. Ten-year Bund yields also jumped six basis points, to 2.75%.

Francesco Pesole of ING noted that Governor Ueda’s tone was unexpectedly hawkish, adding that political opposition to rate hikes — previously assumed under new Prime Minister Sanae Takaichi — may no longer be a constraint.

“Markets were caught off guard,” Pesole said.

Implications for the ECB

The upward pressure on European yields comes at a delicate time for the European Central Bank, which is widely expected to keep rates unchanged at its final meeting of the year in December. Analysts do not foresee cuts in the near term, with services inflation and weak economic growth creating a policy conundrum.

“Interest rates of 2% are already low,” said Nellis. “In the current climate, we are unlikely to see central banks in Western economies move much lower.”

While inflation appears broadly contained, spillovers from global markets — particularly Japan — could continue to drive eurozone yields in the near term, even in the absence of strong domestic triggers.