Early Morning Reid Macro Strategy

DB - Early Morning Reid - Macro Strategy

Key Market Data (Index @ Close // Change) (S&P 500 @ 7638 // +1.14%) (STOXX Europe 600 @ 643 // +0.86%) (iTraxx Crossover @ 253 // -5) (Brent Oil^ @ 103.84 // -1.09%) (10yr Treasury^ @ 4.94 // -5 bp) (10yr Bund @ 3.48 // -3 bp) (Dollar Index^ @ 100.21 // -0.06%) (Further Fed hikes/cuts priced for 2026 @ 32 // -1 bp) (Further ECB hikes/cuts priced for 2026 @ 37 // 2 bp) ^ - Change from previous day's 4:30 GMT to 04:30 GMT

Welcome to the end of the week as I hit day 8 of manflu, a variant passed on by my 11-year-old daughter who was ill with it for precisely 18 hours. In other injury news, I've slightly sprained my wrist awkwardly cutting up a mango! I'll add that to the list of ailments my body is currently processing.

Distracting me as I try to type through the slight pain, the main story overnight is that the Bank of Japan have delivered another 25bp rate hike, taking their policy rate up to its highest since 1995, at 1.25%. This is the second of the year and the 6th since they started hiking in March 2024. The move follows on from the Fed’s hike on Wednesday, and the ECB’s hike last week, which leaves us in little doubt we’re in a globally synchronised cycle of rate hikes again, with more likely ahead from all three.

Having said that, it was a more dovish hike than expected, with Ayano Sato and Toichiro Asada calling for a hold on the grounds that Japan’s economic outlook was uncertain. Both dissenters were appointed by Prime Minister Sanae Takaichi to the board. So there is some suggestion that this may infer less political support for the rate hike than has perhaps been indicated by US Treasury Secretary Bessent who has been quite firm on the fact that the US and Japan are aligned.

So although the central bank reiterated that it will continue raising rates if economic and inflation conditions evolve as projected, the market has reacted to the two high profile dissenters. The Yen is -0.72% lower at 157.10, having been at around 153.40 at the start of the week and the JGB curve has steepened, with 2yrs -2.2bps and 30yrs +3.2bps. We'll see what the BOJ press conference brings at 7:30am London time.

The BOJ decision came just hours after the release of August inflation data, which showed price pressures remaining broadly stable and close to the central bank’s target. Core CPI, which excludes volatile fresh food prices, rose 1.7% year-over-year in August, slightly below market expectations of 1.8% and down marginally from the previous reading. Meanwhile, core-core CPI, a key measure of underlying inflation closely monitored by the BOJ, remained unchanged at 1.9%. Headline CPI also increased 1.9% year-over-

year, matching the pace recorded in the previous month and reinforcing the view that inflation remains relatively stable.

The Nikkei (+1.67%) has moved higher on the back of the weaker Yen but Asia is stronger anyway following on from the global rally yesterday. The KOSPI (+2.59%) is leading regional gains, with semiconductor stocks extending yesterday’s rally. Meanwhile, mainland Chinese equities are posting solid advances, with the CSI 300 (+1.05%) and Shanghai Composite (+1.04%) both sharply higher, while the Hang Seng (+0.67%) is recording more modest gains. Elsewhere, the S&P/ASX 200 (-0.02%) is little changed and S&P 500 and Nasdaq futures are both +0.14% higher.

The yuan has strengthened to its highest level in more than four years as the PBOC continue to guide the currency higher ahead of next week’s planned meeting between Chinese President Xi Jinping and US President Donald Trump, where trade relations are expected to be a key focus. The offshore yuan is advancing +0.14% to 6.695 per dollar, marking its strongest level since July 2022. The PBOC also set a firmer daily fixing for the eighth consecutive session, the longest such streak since 2023.

Those overnight developments come after a very strong session yesterday, with markets rallying thanks to a clear drop in oil prices and a decent batch of US data. Indeed, the S&P 500 (+1.14%) posted its best day in over a month, whilst the 10yr Treasury yield (-9.2bps) saw its biggest daily decline since June as it ended a run of eight…