Global Markets Strategy

Research evidence excerpt

Global Markets Strategy

ening bias, although the central forecasts

were more dovish than the market expected. We call for a BoE hike in November

but that will require evidence of firming in underlying services inflation or wage

expectations. In Japan, the BoJ kept policy rates on hold at 1%, although striking

a hawkish tone that suggests the BoJ has become more attentive to upside inflation

developments; we continue to call for the next hike in October.

• Separately, in Japan, market focus remained on potential shifts in GPIF allocation

towards domestic assets. We estimate that implications for foreign govies from

such re-allocation would likely be modest under two worst-case scenarios if domes-

tic bond allocation is increased within the current fluctuation bands or in case of

a Basic Portfolio review.

Over the past couple of weeks, DM yields bear steepened across the board given a further

rise in energy prices, fuelled by a continued re-escalation in the US-Iran conflict and Houthi

threats in the Bab-el-Mandeb Strait, combined with renewed tariff headlines and rising

doubts over Fed credibility following this week's meeting (Figure 1Overthepastcoupleofweks,DMyieldsbearstepenedacrostheboard,drivenbyafurtherriseinenergyprices,renewedtarifheadlinesandrisingdoubtsoverFedcredibilityfolowingthiswek'smeting). US yields underper-

formed cross-market, given a sharp and unusual twist steepening of the curve post-Fed

meeting as Warsh’s delivery at the press conference raised questions about the Fed's credi-

bility in delivering lower inflation.

In terms of strategy, we see risks of further bear steepening in the US amid concerns over

the Fed's credibility. In Europe, we remain bullish on duration, seeing limited risks from the