Mizuho on US CPI and BoJ
Although the September US CPI came in stronger than expected, it did not necessarily provide compelling evidence that inflationary pressures are broadening and is therefore unlikely to force the Fed to move up the timing of its next rate hike. Our main scenario remains that the FOMC will leave rates on hold in October. Even if the Fed were to hike in October, we think the likelihood of the BOJ also raising rates that month is low, given that it continues to characterize back-to-back rate hikes strictly as an “emergency response.” The UST curve underwent a bull flattening in the latter half of the week, apparently in part because of the decline in equity prices. However, as rates continue to trend lower even after the stock market rebound, we think the term-premium-driven rise in rates may be unwinding, which is likely to be broadly positive for JGB market sentiment. However, yen rates appear to have been relatively unaffected by the previous rise in US term premia, suggesting that downward pressure on yen rates may be limited when that move reverses. SHORT-TERM OUTLOOK (ONE WEEK - ONE MONTH) In Japan, with the market largely expecting the BOJ to forgo a hike in October and to raise
Although the September US CPI came in stronger than expected, it did not necessarily provide compelling evidence that inflationary pressures are broadening and is therefore unlikely to force the Fed to move up the timing of its next rate hike. Our main scenario remains that the FOMC will leave rates on hold in October. Even if the Fed were to hike in October, we think the likelihood of the BOJ also raising rates that month is low, given that it continues to characterize back-to-back rate hikes strictly as an “emergency response.” The UST curve underwent a bull flattening in the latter half of the week, apparently in part because of the decline in equity prices.
However, as rates continue to trend lower even after the stock market rebound, we think the term-premium-driven rise in rates may be unwinding, which is likely to be broadly positive for JGB market sentiment. However, yen rates appear to have been relatively unaffected by the previous rise in US term premia, suggesting that downward pressure on yen rates may be limited when that move reverses. SHORT-TERM OUTLOOK (ONE WEEK - ONE MONTH) In Japan, with the market largely expecting the BOJ to forgo a hike in October and to raise rates in December, monetary policy expectations are likely to remain stable barring a surprise such as indications of an October rate hike.
Together with the aforementioned reversal of the term-premium-driven rise in overseas rates, this should be broadly supportive of the market. However, to the extent that the rise in US term premia had a relatively limited impact on yen rates, a reversal of that rise may conversely also have a limited impact. In view of that and the lingering uncertainty over fiscal policy, we do not anticipate a sharp decline in yields.