Conference Presentation, Earnings Call, Webinar
Global Rates & FX Views: Central banks – the aftermath
- The Bank of Japan (BOJ) has shifted to a hawkish stance regarding inflation, with officials stating underlying inflation is now close to or at the 2% target, though a September rate hike remains a risk scenario rather than the base case due to limited new data between now and then.
- October is identified as the more probable timing for a BOJ rate hike, pending the release of September and October price data, updated inflation expectations, and evidence on the economic impact of the June rate increase.
- Exchange rate volatility, specifically USD/JPY movements, is now a monitored risk factor for the BOJ; a breach of the 165 level or a resumed upward trend in the yen's weakness could force a September hike as a risk management response, whereas a stabilized yen supports an October timeline.
- Analysts forecast three additional BOJ rate hikes with a baseline sequence of October, March 2027, and October 2027, projecting a policy rate of 1.75% by the end of 2027.
- Additional hikes beyond late 2027 are considered unlikely due to political constraints, including a predicted leadership reshuffle in spring 2028 and upper house elections in the subsequent summer, though 1.75% is not viewed as a definitive terminal rate.
- The Bank of England (BOE) maintained a balanced message without signaling an imminent rate hike, despite a six-to-three voting split on policy, and provided updated analysis suggesting cumulative Quantitative Tightening (QT) has raised 10-year yields by 20 to 30 basis points.
- Regarding future BOE QT, no strong guidance exists for the period between October 2026 and September 2027, with plausible outcomes ranging from an unchanged $70 billion pace to a slowdown to $50 billion, where active gilt sales would remain at $20 billion.
- The Federal Reserve (Fed) held rates in July because inflation was not deemed urgent enough to warrant an immediate hike, creating a credibility risk of "talking tough and not acting" while markets repriced December odds from 1.8 to 1.3 expected hikes.
- Market expectations have shifted to a baseline for a Fed rate hike in September, with 65% probability priced in, as analysts do not view the July hold as a reduction in willingness to act if inflation remains sticky.
- Fundamental fair value for 10-year Treasury yields is estimated at 4.15% to 4.2%, contrasting with current levels around 4.7% which signal the market may be "two-sigma cheap," though analysts caution this may reflect model breakdowns rather than true value.
- The reflationary phase is expected to peak and fade over the next six to 12 months, with analysts noting that the Fed may ultimately implement more hikes than currently priced if inflation pressures persist.