Sunrise Market Commentary

Markets

• The Fed and its chair Warsh delivered. The first rate hike, from 3.5%-3.75% to 3.75%-4%, in three years won’t be the last. Yesterday’s vote was unanimous and updated dots (ex. Warsh) show 16 out of 18 policymakers expecting another move this year. Eight of them have penciled in a third, final increase in 2027. Starting in 2028, the cycle would reverse and end up in a higher neutral rate (3.25%). Warsh in a less than 30 minute lasting press conference said three things had changed compared to the previous meeting in July. 1. The economy has strengthened since, which also shows in the labour market. 2. Warsh at Jackson Hole stated that the Fed “must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed.” He judged yesterday that inflation trends have not meaningfully improved over the summer. Warsh estimated August PCE at 3.6% and said that too many categories are posting increases above 3% on a six- and 12-month basis. 3. The geopolitical situation has changed. Energy prices rose sharply and add to the upside inflation risks. The rate increase is labeled as “removing a dose of accommodation”. That means the Fed does not consider current monetary settings to be restrictive yet and neither are the broad financial conditions (even after the recent bond yield surge). The same message pops up in the new forecasts. Growth is forecasted to remain above potential, unemployment below the equilibrium rate and inflation above the 2% holy grail until 2029. If this scenario materializes, then the above-mentioned dots are too conservative. The market reaction was a vote of (renewed) confidence in Warsh and the Fed. Short-term yields climbed more than 7 bps to hit the highest since July 2024. Money markets are split on October but more than price in a next move by December. Two additional increases are discounted by mid-2027. Long-term yields rebounded from the lows but trailed the front-end. The 10-yr tenor for example did not push through to new highs. The US dollar strengthened to the best level against the euro in six weeks. EUR/USD lost the 1.15 barrier to currently trade around 1.1466. There’s room for further USD bullish positioning towards the 1.14 area.
• The Bank of England meets today. Last week, BoE governor Bailey acknowledged rising inflation risks which might trigger a shift within the central bank. New forecasts from the Food and Drink Federation last week suggested food inflation could rise to nearly 4% by Christmas, averaging 5.5% over the course of 2027. The BoE up until now counted on 3.5% food price inflation by year-end. Bloomberg analysis today shows that UK household energy bills are expected to rise by about 25% when regulator Ofgem resets price caps in January. That increase in energy costs could push UK headline inflation above 4% in 2027. This significantly deteriorating inflation outlook leaves the BoE with little options but to hike policy rate according to UK money markets. They currently factor in just shy of 100 bps of cumulative tightening over the next 12 months. According to the UK Daily Telegraph, the Bank of England will also end the active sale of 20- and 30-yr bonds in its updated quantitative tightening plan for the year ahead. Investors expect the overall pace to slow down from an annual £70bn to £50bn.

News & Views

• New Zealand’s GDP rose by 0.2% Q/Q in Q2 2026, beating the 0.1% consensus estimate, but slowing from 0.9% in Q1 2026. Growth was 2.6% higher in Y/Y-terms, the fastest pace since Q2 2023. A supply-side breakdown showed mixed results with increases in 9 out of 16 industries. Construction was the largest upward contributor, with the sector growing at its fastest clip since Q2 2023 (+2.7% Q/Q). An increase in residential building activity contributed to the overall growth. The largest downward contributors to GDP were transport, postal, and warehousing (-1.7% Q/Q), and retail trade and accommodation (-1% Q/Q). On the expenditure side, consumer spending increased a meagre 0.1% Q/Q (+0.9% Y/Y). Gross fixed capital formation was stronger at 1.5% Q/Q, led by increased spending on residential building work. Export volumes rose 3.3% Q/Q. Import volumes fell by 0.8% Q/Q. The outcome suggests that the New Zealand economy has more momentum than the central bank (RBNZ) expected. In line with global tightening trends, it lifts the probability of a 25 bps rate hike at the next, October, meeting to 65% (up from 50%). The kiwi dollar tries to fight USD strength this morning after almost hitting NZD/USD 0.57 yesterday for the first time since July.