Bank of Japan hikes and Bank of England on hold

In focus today

• In the euro area, The ECB's Consumer Expectations Survey is released today. Inflation expectations remain higher than before the war but have trended lower over the past three months. It will be important to see whether this trend continues. In Germany, attention turns to Sunday's state elections in Berlin and Mecklenburg-Vorpommern, following the far-right AfD's landslide victory in Saxony-Anhalt two weeks ago. A CDU victory in Berlin and an SPD hold in the north-east would ease pressure on Merz. A poor result in either state would revive speculation about replacing the Chancellor and reinforce the emerging narrative of a political risk premium.
• In the US, industrial production data for August is due for release.

Economic and market news

What happened overnight

In Japan, the Bank of Japan hiked its policy rate to 1.25%, in line with expectations. The decision was taken with a 7-2 vote. This comes just three months after the recent hike and thus marks a change from the previous very cautious approach. The BoJ highlights its intention to "continue to raise the policy interest rate and adjust the degree of monetary accommodation", just like it did in July. Even so, USD/JPY traded above 157 levels on the decision. This reflects some speculation in recent weeks of a potential jumbo hike and the fact that it does not sound like a central bank ready for back-to-back rate hikes, not least considering the two dissenting votes. They were cast by two board members appointed by PM Takaichi, indirectly highlighting the government's stance on the matter. Ahead of the decision, August CPI inflation excluding fresh food edged a bit lower to 1.7%, below consensus. Domestic price pressures in Japan remain quite modest.

In commodities, oil prices eased for a third day as reports of efforts to restore Saudi export capacity reduced some immediate supply concerns. Brent remain slightly above USD 100/bbl. but is heading for its first weekly decline in three weeks as markets wait for clearer evidence that physical flows are normalising. Fresh Saudi-Houthi strikes and risks around the Strait of Hormuz keep a geopolitical premium in place, although any sustained improvement in regional traffic could see that premium unwind further.

What happened yesterday

In the UK, the Bank of England kept the Bank Rate unchanged at 3.75%, in line with expectations, with a 6-3 vote as Pill, Greene and Mann again backed a hike. The decision was broadly as expected but given the very hawkish market pricing going into the meeting, the outcome triggered some GBP weakness and lower rates. The QT announcement was also close to expectations, with the remaining stock set to be unwound at an annual average pace of GBP 46bn by the end of 2034. Overall, the MPC acknowledged that upside risks to the inflation outlook have increased since July but also stressed that uncertainty remains very high. We maintain our call for unchanged Bank Rate this year and a rate cut in June. The risk is however increasingly skewed towards a hike in Q4. Read more here: Bank of England Review - Some less hawkish tunes, 17 September.

In Norway, Norges Bank's regional survey points to slightly stronger near-term growth than assumed in the June Monetary Policy Report, with respondents expecting growth of 0.3% in both Q3 and Q4. This is marginally above Norges Bank's June estimates of 0.3% and 0.2%, respectively. The details are mixed, however, as capacity utilisation fell to 28% from 30% and the share of companies reporting labour shortages declined to 17% from 18%. Wage expectations were unchanged at 4.5% for 2026, while the 2027 estimate edged down to 4.0% from 4.1%, broadly in line with Norges Bank's June forecasts. Overall, the survey suggests lower capacity utilisation but still elevated wage growth, which should pull the rate path somewhat lower and supports the view that Norges Bank will keep the policy rate unchanged at 4.25% next week.

In the euro area, the final euro area inflation print was revised slightly down to 3.2% y/y from 3.3% y/y in the flash release while core was confirmed at 2.4% y/y. The revision was due to rounding as headline came in at 3.246% compared to 3.256% y/y in the flash, which is 0.01 percentage point lower, so it is not a dovish revision. The details reveal that inflation was still very contained to energy products in August. The ECB's measure of "energy sensitive core inflation" moved down in August as did the "LIMI" measure of domestic inflation. 

Equities: Equities rebounded strongly on Thursday. The S&P 500 advanced 1.2%, the Nasdaq gained 1.7% in its best session since early August, the Stoxx 600 rose 0.9%, and Kospi is surging a remarkable 2.7% at the time of writing. We must therefore conclude that a Fed hike (along with the four additional hikes priced over the next 12 months) was not the end of the world for risk assets. The gravitational force on equities remains higher. Consensus earnings growth of 35% this year, with estimates still trending upward, makes a sustained equity sell-off, or even a pause, increasingly difficult. As earnings compound, valuation multiples contract rapidly, which provides a cushion to higher rates.

As the regional performance reveals, the AI trade was once again the standout. Semiconductor and memory stocks led the advance, but big tech also posted solid gains. Intel, AMD and Micron all rallied between 6-8%. On the back of the reasoning above, we advocate a barbell strategy: buying global tech with historical earnings growth and undemanding valuations, financed by an underweight position in global industrials, where valuations remain elevated despite significantly weaker earnings. Notably, industrials were among yesterday's weakest performers despite the broader risk-on backdrop, perhaps signalling that investors are becoming increasingly selective.

FI and FX: Yesterday's broad rebound in risk sentiment was reflected in FX markets as well. EUR/USD was relatively little changed just below 1.15, but cyclicals AUD, NZD, SEK and NOK all outperformed the rest of G10. 10y UST yield declined to pre-FOMC levels, while the short-end is still elevated after Warsh's hawkish remarks. European swap rates edged lower during yesterday's session as energy prices retreated with European natural gas prices breaking back below 80 EUR/MWh. The oil market in particular has likely found some relief in the news that Saudi Arabia has partly restored flow through the key East-West pipeline that was damaged last week. USD/JPY rose to around 157 this morning, up roughly one figure following the BoJ's widely anticipated 25bp hike to 1.25%. While the hike itself was fully priced, the 7-2 vote was more notable, with Board members Toichiro Asada and Ayano Sato dissenting.