Markets
- USD/JPY surges to 157.1 this morning. The pair has now recouped about half of the impressive JPY gains earlier this month. The Bank of Japan as expected lifted the policy rate by 25 bps to 1.25%, the highest since 1997. The decision was a 7-2 split vote and that came as a dovish surprise. After weeks of hawkish speculation, fueled amongst others by US Treasury Secretary Bessent and BoJ policymaker Takata, the two dissenters are suddenly casting doubt on the (speed and size of the) central bank’s future tightening plans. The fact that August CPI (1.7-1.9% depending on the gauge) just missed the bar doesn’t help of course, even though underlying momentum remains on track for the BoJ’s 2% target. The BoJ views the current rate as accommodative still which firmly supports economic activity. It will “continue to raise the policy interest rate and adjust the degree of monetary accommodation, in response to developments in economic activity and prices as well as financial conditions.” Money markets price in an 80%+ chance for another move by December. Japanese yields drop a few bps at the front end of the curve. Long end yields, though flat on the day, showed an interesting intraday turnaround (inflation risk premia?).
- UK gilts outperformed peers yesterday in the wake of the Bank of England’s policy decision. Long-term bond yields stumbled up to 12 bps (30-yr). The BoE will continue to sell government bonds as it further winds down a legacy portfolio through the 2034 planned end-date. It would, however, spare the longest maturities in doing so. The annual pace, on average £22bn passively + £20bn actively, was slower than expected and a deceleration from the current £70bn. The BoE is also considering selling the bonds to the government’s DMO instead of the market. That offers the DMO the possibility of replacing them by gilts with maturities that better meets market demand. In any case, sales are paused until April 2027 while policymakers are hashing out the final details of the plan. The rate was kept unchanged at 3.75% in the same 6-3 split decision as July. Front-end yields eased up to 2.3 bps. Losses were bigger at first, probably reflecting some disappointment that no one of the majority had flipped to the hawkish camp. Some appear close to doing so, however, including governor Bailey. Risks to the upside have increased, owing to the recent sharp increase in energy prices. UK money markets attach an 83% probability to a November rate hike, the first of about four in total (by mid-2027). EUR/GBP tested the 0.86 big figure on sterling weakness but failed to close above.
- Treasuries rallied too. The dust from Wednesday’s FOMC settled and it looks like chair Warsh with his hawkish hike managed to convince markets of the central bank’s price stability commitment. Easing energy prices – despite them recovering from the intraday lows – helped support the move. US yields dropped 7.3-10.1 bps and the 10-yr is backing off the 5% psychological barrier for now. German yields joined the way down, be it less outspoken. The US dollar gave back some of the post-Fed gains in a risk-on session. EUR/USD finished at 1.1476. For the euro and euro yields the ECB’s consumer inflation survey and a speech by ECB’s Lagarde could be the driving element today.
News & Views
- The Czech National Bank Board in a unanimous decision kept interest rates unchanged at 3.75% yesterday. The CNB noted inflation has been around the 2% target since 2024 and will temporarily increase in late 2026/early 2027. Core inflation remains elevated, above all due to services, including housing prices. But the central bank considered the June hike has so far led to a sufficient tightening of monetary conditions. Rising long-term rates worked in the same direction. Risks to inflation remain tilted to the upside, however, on strong domestic demand, a tight labour market, a possible acceleration in household lending and supportive fiscal policy. The Czech koruna closed unchanged yesterday around EUR/CZK 24.32. Swap yields extended an earlier, energy-driven decline. Net changes varied between -3.7 and -5.3 bps in a bull flattening move.
- The US is said to hold off announcing new import levies on China until after the presidential meeting scheduled next week. The Trump administration launched an investigation into several major trading partners back in March over excess capacity concerns. Bloomberg reported earlier that this resulted in a 7.5% tariff on Chinese products. The reason for the delay is unclear but could be seen as president Trump holding some leverage going into next week’s talks with Xi Jinping.
