Strategy Daily

Evelyne Gomez-Liechti | Multi-Asset Strategist (Mizuho International Plc) |

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Fed confirms the hawkish shift. The Fed delivered the hike (3.75-4.00%), but the bigger message was that this is not a reluctant tightening cycle. The unanimous vote, higher dots and Warsh’s focus on inflation and stronger demand leave the market facing a credible risk of another move in October, rather than an automatic pause. The curve’s aggressive bear flattening was justified, although pricing of 3 to 4 additional hikes now leaves less room for further hawkish repricing without another firm round of data. We still expect three hikes cumulatively over the next couple of quarters, with risks skewed towards front-loading. October is live if coming data remains strong. Today should be a bit less eventful in terms of macro, with jobless claims and Philly Fed, as well as the 10Y TIPS auction, which will test demand after the latest rise in real yields. Overnight, USTs recovered modestly, with 2Y yields around 4.72% and the long end 3bp richer. Energy prices kept falling overnight after the ~4% fall on Wednesday, as reports of Trump reportedly meeting Gulf leaders next week offered a potential diplomatic off-ramp. However, continuing Houthi-Saudi attacks and the risk of disruption across both Hormuz and Bab-al-Mandeb keep the risk of escalation on. DXY rose on Wednesday’s hawkish Fed outcome and is back above 100, with higher US rates and still-elevated oil likely supporting the dollar near term. Duration could still suffer in the next month if data is strong and October becomes “more live” (13bp priced now), but the lack of near-term data releases may be enough to see some consolidation in USTs in the near term, especially if the energy price falls extend from here.

Energy still sets the direction. EUR rates found support from Wednesday’s oil decline, but the Fed has reset the global rates backdrop before today’s final EZ CPI and heavy French and Spanish supply. The front end still prices almost two ECB hikes by February and a third by April, which looks difficult to reconcile with below-trend growth once the near-term energy shock fades. Energy prices remain the binding variable. Another leg higher would keep terminal pricing elevated and cap duration performance, while a sustained move lower should allow the front end to lead a rally. We retain a small bullish duration bias, focused on shorter maturities where policy pricing looks most stretched, rather than the long end where supply and fiscal risks remain a headwind. France remains the weak link given renewed uncertainty around the 2027 budget (Le Pen now leaving the door open to a no- confidence vote over the 2027 budget), so we would avoid reaching for OAT spread tightening into today’s supply. EUR/USD fell after the Fed and trades around 1.1475.

QT matters more than the hold. Today’s BoE meeting should be more about QT than Bank Rate. A hold with a 6-3 vote remains our base case, with Mann, Greene and Pill backing a hike. The inflation data did little to strengthen the hawkish case. Headline CPI rose on energy, but services and core inflation were unchanged and there is still limited evidence of second-round effects. That makes the market’s policy path, with a November hike almost fully priced and three hikes by March, look too aggressive. The cleaner dovish surprise could come from QT. We expect a shift to passive-only runoff, while consensus looks for a £50bn envelope with fewer, or no, long-end sales. Passive-only QT should support gilts and wider swap spreads. We favour receiving the front end. GBP/USD fell below 1.34 after the Fed, and the question now is whether the BoE meeting provides further tailwinds to the move lower in the currency pair.

Mixed session in Asian equities, with markets reacting to the better risk sentiment overnight and the hawkish Fed meeting. JGBs twist-flattened while USD/JPY pared gains and trades now around 155.50 ahead of tomorrow’s BoJ meeting, where a hike is broadly expected, and focus will be on any guidance for the…