Muzinich Weekly Market Comment: Mission Accomplished
Insight
December 15, 2025
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Although often the least discussed primary role of central banks, financial stability is rooted in their historic function as “lender of last resort” (LOLR), designed to maintain confidence in the financial and banking system. Thornton (1802) argued that only a central bank, with its monopoly on issuing money, could supply the liquidity needed to meet panic-driven cash demands and prevent a collapse of the money supply. Bagehot (1873) formalized the classic rule – lend freely, at a penalty rate, against good collateral – to halt panics and stop temporary liquidity shortages from driving solvent banks into insolvency.
This logic ultimately shaped the creation of the US Federal Reserve in 1913, after repeated financial panics, especially in 1907, demonstrated the need for a central authority capable of providing reliable liquidity in times of stress; and in modern times, the 2007–2009 Global Financial Crisis powerfully reinforced this original purpose of central banking.
So, last week, central banks were likely pleased with the market reaction to their policy meetings and communications. Ten-year US Treasury and German Bund yields were essentially unchanged, global credit and currency markets were range-bound, and equities edged modestly higher, with the Bloomberg World Large & Mid Cap Index up just over 0.3%.
The main outlier was commodities: ongoing supply-driven shocks continued to push metals higher, with copper hitting a new all-time high as miners struggle to keep pace with expanding smelter capacity, while the energy transition is boosting demand for the metal in renewables. In contrast, energy prices fell roughly 4% amid concerns of oversupply; the International Energy Agency now projects a 3.84 million-barrel-per-day (bpd) surplus in 2026, slightly below its earlier estimate of 4.09 million bpd, but still indicating a substantial glut.[1]
In Asia, the Bank of Japan (BOJ) was likely pleased to see Japanese Government Bonds outperform their global peers at the long-end, with 30-year yields falling about 3 basis points (bps) on the week, while the yen remained stable and the Nikkei 225 finished higher – a stark contrast to the volatility and price instability that followed initial BOJ policy tightening in January.
Responding to questions in parliament, Governor Kazuo Ueda acknowledged recent rate increases had been “somewhat rapid,” and emphasized that, if long-term yields were to rise in a manner inconsistent with normal market conditions, the BOJ would respond, including by increasing government bond purchases. He further added adjusting the degree of monetary easing would help support stability in financial and capital markets and place Japan’s economy on a more sustainable growth path, particularly as a tighter labour market continues to push wages and prices higher while real interest rates remain low[2]. The overwhelming consensus is now for the BOJ to lift policy rates by 25bps on 19th December.
In Europe, the UK front-end outperformed, with 2-year gilt yields falling 6bps as investors prepared for the Bank of England (BOE) to cut rates by 25bps on 18th December. The move reflects growing optimism and relief that the BoE has finally conquered its inflation battle, clearing the way for lower borrowing costs.
Meanwhile, one can imagine the mood at the European Central Bank (ECB) as one of smug satisfaction, with policymakers reflecting on the successful normalization of policy that has delivered a state of monetary equilibrium. This confirms the old central banking adage that the best decision for a central bank is to do nothing – a sign that market stability has been achieved. This is reflected in the overnight index swap market, which is currently pricing no changes to ECB policy through 2026.
While a noted hawk, ECB Executive Board member Isabel Schnabel, said in an interview at her Frankfurt office that, although borrowing costs are at levels that – barring further shocks – will be appropriate for some time, consumer spending, business investment and a surge in government outlays on defence and infrastructure will continue to support the economy. “The next rate move is going to be a hike, albeit not anytime soon,” Schnabel added.[3]
In the US, the Federal Open Market Committee (FOMC) delivered the widely expected 25bps rate cut, bringing the target range to 3.50%–3.75%. While the cut was anticipated, markets had positioned for a slightly more hawkish outcome. At the press conference, Chair Powell struck a dovish tone, emphasizing a wait-and-see approach to future policy adjustments, and noting the federal funds rate is now within a broad range of estimates for its neutral level. However, his concern about the labour market outweighed inflation risks, describing job creation as “extremely weak,” with payrolls declining by roughly 20,000 per month. Conversely, Powell reassured investors that inflation was tracking a touch lower than anticipated, with the tariff-induced price pressure expected to peak and fade in the first quarter of 2026.[4]
The updated December Staff Economic Projections, in contrast to Chair Powell’s press conference, painted a picture of a Goldilocks economy over the coming years: growth above trend, falling inflation and stable unemployment, suggesting the Committee is factoring in productivity gains from AI. For 2026, growth was raised by 0.5% to 2.3%, while inflation and unemployment are expected to peak in 2025 before gradually moving toward long-term equilibrium (see Chart of the Week).[5] The new dot plot showed no change in median projections: 3.4% for 2026 (implying 25bps of cuts) and 3.1% for 2027 –2028, consistent with a long-term neutral policy range of 3.00%–3.25%. The overnight index swap market implies the FOMC may reach this neutral range slightly faster, by the end of 2026.[6]
As we close 2025, we reflect on a year that on paper promised to be challenging for central banks. It seems the BoJ has found a way to adjust policy without triggering excessive volatility, the BoE has defeated inflation, the ECB has delivered a state of monetary equilibrium and the FOMC has steered the US economy back toward a Goldilocks scenario. Mission Accomplished!
We look forward to resumption of the Muzinich Weekly Comment in 2026. We wish our readers much joy and prosperity in the New Year.
Chart of the Week: FOMC Projection – “Goldilocks?”
Forecasts mentioned are not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy.
Source: FOMC projections materials, as of 10th December 2025. For illustrative purposes only.
Past performance is not a reliable indicator of current or future results.
References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.
References
[1] Bloomberg, ‘IEA Slashes 2026 Oil Glut Forecast in Rare Warning as Demand Surges, Sanctions Hit Supply and Global Markets Brace for a Massive Shakeup,’ December 12, 2025
[2] Reuters, ‘BoJ Governor Ueda says rises in long-term interest rates “somewhat rapid,”’ December 9, 2025
[3] Bloomberg, ‘ECB’s Schnable “Rather Comfortable” on Bets Next Move to Be Hike,’ December 12, 2025
[4] Bloomberg, ‘US REACT: FOMC Sends Dovish Signal Despite “Silent” Dissents,’ December 10, 2025
[5] FOMC Projections materials, December 10, 2025
[6] Bloomberg, as of December 12, 2025
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