Markets not convinced by BoJ hike

0:00So the Bank of Japan lifts your rates and the Yen falls. Please explain. Well, we will. There's also speculation of some sort of currency intervention there, but will that happen? Plus what the RBA said in front of the Senate on Friday, how European politics is messing with bond markets, and it's the week of the G and Trump meeting. It is Monday, the 21st of September, 2026. It's the morning call from now. Good morning. Very little movement in the US dollar on Friday or on Thursday for that matter, but there was a 0.6% fall in the Yen. The Aussie is up slightly to over 71.2 US cents. Big movements in bonds, though. Ten year treasury has rose seven basis points on Friday, back up to 5%. Ten year guilt in the UK also up seven. And Europe generally varies between a four basis point rising Germany to 12 basis points for ten year bonds in France, whereas Aussie ten years fell four basis points on Friday to 5.26%, but up eight basis points on futures since then.

1:01And shares higher in the United States than Aztec was at 0.4%, 0.2% for the S&P, but lower in Europe, the Dax down 1.6%, the FTSE 100 down 1.5%. But the Nikkei was up 1.4% in Japan, and oil, well, it fell, but not by much conviction going on there. Just 0.9% off Brent, 1.6% off WTI Brent now just below 104. But it was bond markets that showed the most action, and that movement in the yen as well. Here's Nabsat, Sally Old. So interesting that Japanese government bonds were less volatile and most, yet the move by the Bank of Japan on Friday really did play with the yen quite a bit, didn't they? Yeah, good morning Phil. It did, because we got the outcome. So rates were lifted 25 basis points, but it was a split decision. So 7-8 voting in favor of the hike to against, and I guess the market was pretty quick to work out that the two dissenters were recent appointments by the Japanese Prime Minister.

2:05And so I guess that was a real contrast to, I guess, the early in the week, the ECB, you know, where President Lagarde described that as a no-brainer, and then clearly the unanimous decision by the FOMC as well. So the market's initial reaction to that was dovish, pushed down two-year yields, and then also the yen underperforming. And then we had the press conference, but again, you ate his comments. I guess just weren't strong enough or didn't appear to have enough resolve to really convince the market that the Bank of Japan gets it and realizes that real rates need to be not negative anymore in Japan. And so as London opened up, you know, that really pushed Dolly-N up towards that 158 level in early London trade. And then what happened, as you said in your early comments, is, you know, actually rallied a bit later on as various news sources were reporting that there were some rate checks

3:07going on in the Dolly-N market, which the market basically takes as a signal that some intervention might be coming. So yes, it was the outcome that everyone expected, but it did generate a bit more volatility, particularly in FX markets. Yeah, do they actually need to intervene? If they do the rate check, then everyone starts to get nervous, I guess, of the market response to that. Yeah, that's right. So it's also tricky because Japan is out on holidays for the next couple of days as well. So it's going to be a pretty thin market. And it probably means that, you know, any threat to intervene might have more outsized reactions in the FX market. So I guess, you know, as we open up this morning, FX traders will just be keeping half an eye on what's going on in that cross. But that's the time to intervene, isn't it, when trade is thin? So is that part of the schedule, do you think, is that why they've been doing this rate check? Because something's going to happen over the next couple of days. Possibly, possibly. But it sort of feels like, you know, I would say, intervening when markets are still questioning,

4:11you know, the Bank of Japan's resolve and commitment to embark on, you know, a tightening cycle that reflects economic fundamentals does feel a little bit sort of self-defeating. So I think, you know, if it was backed up by actions and words, and, you know, well, forward guidance isn't really the thing at the moment in the world of central banking. As we saw from the Fed earlier in the week, like, it's not that hard to sound hawkies. And I guess the market was just left after the decision and the press conference. With just probably a little bit more uncertainty than it would otherwise like to be really convinced that the Bank of Japan gets it. Now, I'm not expecting there's going to be much market reaction to the Greenland deal announced over the weekend. I mean, the only news is that the US isn't going to invade Greenland. But otherwise, I mean, it sounds like actually all it's saying is, because the US can station as many troops or Air Force personnel as they want in Greenland.

5:13That's the deal as it currently stands. It sounds like this is not changed. And the fact that Greenland and Denmark are very happy about it, presumably means yes, not much has changed. It's perhaps just a face-saving offer for President Trump. But that's not the major story in Europe over the weekend, is it really? It's a political story, particularly what's happening in Germany. Generally, the shift to the right in Europe is something that is influencing markets. Yeah, that's right. So, like you said, it was a bit of a change. The headlines weren't over the weekend about the Middle East. They were focused on, I guess, European developments. And like you said, that announcement around a deal of Washington's role over in Greenland doesn't look like it, as you said, changes too much. But we did see some interesting price action in European bond markets on Friday night. And in particular, when we look at the spread between the French tenure yield to German bonds, that posted its biggest single-day jump in more than two years and pushed through

6:14that psychological, 100 basis points level for the first time in 14 years. And that was just sort of really around concern over the French fiscal situation. Leigh the Finance Minister actually later in the day on Friday did sort of acknowledge that the spread rise was due to budget issues, which in itself is a little bit concerning. But then if we go back to the weekend, we're in a bit of a period where there are a number of state elections taking place in Germany at the moment. And we saw a couple of weeks ago the AFD party doing very well in a state election. We had one on Sunday in the state of Mecklenburg, Western Pomerania. We don't have the full results, but the exit polls suggest that the governing city EU party only won 5% of the vote, which is a pretty shocking outcome. And interestingly, the German Chancellor Frederick Mertz broke with a protocol, which is that

7:16you don't really speak the day after an election saying effectively it was a total disaster. So question marks are being asked, I think, about the sustainability of his leadership. And so he's decided at the last minute not to go to the EU, to the UN meeting to deal with domestic politics. So does sort of feel at the moment that that sort of rumbling story that's never too far below the service in Europe around this school issues, particularly in places like France and domestic politics is starting to rear its head again. Yeah, the instability of European politics. But just over the water in the UK, I mean, they've had the same Prime Minister for weeks now. And they had the retail numbers on Friday as well. It seems like whenever we talk down the UK economy, it sort of seems to bounce back and says, hey, look, there is some hope. So retail sales at 0.6% in August, they were expected to fall. Yeah, that's right. So, you know, I think probably the UK economy has been more resilient in the first half of 2026 and people had anticipated.

8:18And so, you know, this is another, these were data for the month of August. As he said, stronger than expected. So, you know, perhaps another piece of evidence suggests that third quarter growth is looking pretty solid and definitely does very little to deter the market from, you know, expecting a rate height from the Bank of England in November. And Michelle Bullock and the rest of the crowd who were there from the RBA on Friday and the Senate hearing, they basically turned up their hawkish rhetoric, didn't they? I mean, they are no longer treading that narrow path. She was asked about that. It's now a broad path uphill, basically, as what she's saying, isn't it? Yeah, there were a couple of interesting things that came out of that. So, you know, she gives a prepared remarks first and, you know, she basically said, look, you know, when we put out the August statement on monetary policy, we had a forecast that inflation would come down, but it wouldn't get into the target range until late next year. And she said, we also said at the time, RISTA that outlook was skewed to the upside.

9:22And on Friday, she said that development since the August board meeting suggests that some of these upside risks to inflation appear to be materialising. So, that's new. And basically, I think was, you know, a signal to the market that we've talked about upside risk. We've talked about what we would do if we thought some of those risks are materialising, and now we're telling you that those risks are materialising. So, you know, the market's now close to 90% price for a hike from the RBA at the end of the month. But to your point, she also, I guess, hinted a less favourable trade off between inflation and employment objectives. And so, this is, you know, even though she said, look, you know, I ditched the whole notion of the narrow path quite a while ago. I think the message that they were trying to get across is, you know, maybe there's a bit more of a willingness on the RBA's part to force a larger adjustment on the economy just in order to finally get inflation back into the target band.

10:24And so, you know, I think what we're observing is, you know, not just at the RBA, but maybe across a number of central banks is that they're just losing patience with the stickiness of inflation and, I guess, recent developments in oil markets and price of diesel and petrol are, you know, just exacerbating or reinforcing that dynamic. And so, the Australian Labour force data that we get on Thursday, then, little less significant this time than perhaps? Yeah, I mean, I just sort of think that's not the main game anymore. So, we think employment will be up 20,000 in the month, so that's a pretty decent rise. And it was a bit of a close call between whether we put 4.4 or 4.5 down on the unemployment rate, but we lean sort of marginally towards 4.4%. So, you know, if we're broadly correct in our forecasts, you know, that's just another tick in the box for, you know, why the RBA will raise rates at the end of September. And I guess, you know, the really interesting question sort of feels like that's locked in. And now we really need to think about what happens after that.

11:28So, we'll know a lot more in the next week. We'll get the Labour force numbers. We'll get the RBA statement. We'll get a sense of, you know, are they a bit like the Bank of Japan? So, a couple of dissents or are they more like the Fed in terms of unanimous decision? And then the day after, we'll get the August monthly inflation release. So, we'll know a lot more. But I think it's interesting, like when we reflect back on the week that was, you know, we had the big three central banks of the world, all lived in just rates. You know, the RBA and Z also went in September. The RBA is likely to go. So it does feel very much like that's just not a random coincidence. There is a synchrony city here that suggests we are, you know, basically embarking on a global tightening cycle. And so, you know, from our perspective, we've only got one hike in the forecast. We've signalled the risk of more. But I think that's the issue we really need to grapple with is to whether this is just like one or two rate hikes from a couple of central banks or whether they're about to deliver, you know, something closer to another hundred basis points of tightening over the next couple of quarters.

12:28Yes, and look, RBN Z's certainly going to go again, isn't it? I mean, we got their food. I mean, this isn't enough to make that decision, but their food inflation was up 0.3% for the month of August. But there, I mean, the BNZ's now saying the X, but the Q4 annual rate inflation is going to be 4.2%, which is quite a bit higher than the RBN Z forecast. And of course, you know, if you have a softer US dollar, that's only going to get worse. Fuel prices. I mean, they're going to keep going up. It looks like. So, yeah, another one ready for more. Yeah, that's right. And our colleagues over at BNZ reinstated their call for an October rate hike on the back of stronger GDP outcomes. And then as he said on Friday, just a sense that, you know, there are maybe some upside risk to the third quarter, but definitely fourth quarter inflation over in New Zealand, not looking very pretty as well. So does sort of suggest that the RBN Z will be back in play as well. And oil's not going anywhere. Well, it did go down a bit on Friday, but just because it's got to go one direction, hasn't

13:29it? It wasn't a lot of conviction, as I said, in the introduction, but we had Russia shooting down 1,110 drones, which is the largest ever attack on Moscow, including attacks on an oil refinery. And obviously Russia has retaliated that. They've got parliamentary elections going on in Russia, which I understand Putin's stands a good chance of winning. But, you know, we're not seeing anything on Iran either. So I mean, we're just stuck in the stalemate of oil well over 100, and it looks like it's going to stick there for a while, doesn't it? It does indeed. So today, quiet. We've got the Fed's goalsby speaking at an official monetary and financial institutions forum event in London. He's got a chat entitled monetary policy in an uncertain world. So I guess the question is just one question for him. How long is your feeling now? Yeah, that's right. So it'll be interesting. We saw the decision. We saw warships press conference, and now we get a sense of what Fed officials elsewhere in the banker are thinking.

14:30So goalsby will be interesting this week. But like you said, it's pretty quiet. Japan's out the holidays. So not much going on in Asia. No data released in Australia or New Zealand, although the treasure will release the 2026 intergenerational report. So that will garner some headlines. No doubt. Our population, actually, the weekend edition, the end of this week as well on the back of all of that. And President G is over in the UN General Assembly, and he's going to go to the White House on Thursday. Lots for them to talk about trade, tariffs, Taiwan, Iran. And there's normally a big announcement, these sorts of things. So there's speculation that they're going to answer. Big purchase of Boeing aircraft. Donald Trump loves a big transaction. So there's going to be a lot of focus, obviously, on what President G and Donald Trump say at the end of the week as well. Indeed, they will be. All right, we'll leave it there. Thank you, Sally. Catch you next time, you're on. Thank you very much, school. And I'm loving these light mornings. It's nice to record these podcasts in daylight for now, anyway. That's it for today. I'm Phil Dobby for now. Catch you again tomorrow morning.