Japan’s Inflation Loses Some Heat (28 Sept-2 Oct)

Japan’s annual inflation held at 1.9% in August, while core inflation eased to 1.7%, staying below the BOJ’s 2% target for a seventh month.

The country's monthly inflation slowed sharply to 0.1% from 0.5% in July.

The BoE held rates at 3.75% in a 6-3 vote, with three members backing a hike to 4%. UK inflation reached 3.1% in August as higher energy prices added pressure. The Bank will also unwind gilt holdings at £46 billion annually through 2034.

Currencies

Dollar Index: The dollar index climbed to around 101.1, near two-month highs, as higher oil prices reinforced expectations for further Fed tightening and safe-haven demand. Oil rose after President Donald Trump rejected Iran’s latest proposal to reopen the Strait of Hormuz, while Tehran refused to ease its conditions. Several Fed officials cited resilient growth and a strong labor market as reasons for additional hikes, with Cleveland Fed President Beth Hammack also linking government debt concerns to higher long-term Treasury yields. Focus now turns to the Fed’s preferred inflation gauge and key US jobs data this week.
Euro: The euro slipped to around $1.139, near a two-month low, pressured by a stronger dollar, hawkish Fed commentary and higher oil prices. The currency has lost close to 2% over the past month and nearly 3% over the past year. Meanwhile, eurozone PMI data showed the fastest private-sector expansion in almost three-and-a-half years, supporting expectations for another ECB hike this year.
British Pound: The pound edged up to around $1.325 but stayed near a three-month low as expectations for further Fed hikes supported the dollar. BoE Governor Andrew Bailey said persistently high energy prices could make holding rates harder, while Sarah Breeden and Clare Lombardelli moved closer to supporting a hike. Prime Minister Andy Burnham and Chancellor John Healey face mounting cost-of-living pressure before the October 28 budget. Markets price roughly an 80% chance of a November hike and slightly more than four 25bp increases over the next year.
Japanese Yen: The yen weakened toward 158 per dollar as a stronger dollar and high Treasury yields offset some of Friday’s 1% gain. Finance Minister Satsuki Katayama said President Trump raised concerns about the currency in a meeting with Prime Minister Sanae Takaichi and reaffirmed coordination with US counterpart Scott Bessent after the first joint US-Japan yen-buying intervention since 1998 in late July. A former BOJ official said the central bank could raise rates for a second consecutive month in October as inflation risks rise.

Commodities

Gold Retreats Below $4,250

Gold fell below $4,250 an ounce to a seven-week low as stalled US-Iran negotiations kept oil prices high and strengthened expectations for further Fed tightening. Trump rejected Iran’s proposal to reopen the Strait of Hormuz but expects talks to resume this week, while Tehran refused to soften its conditions. Fed officials cited resilient growth and a strong labor market as reasons for more hikes, with markets pricing roughly a 66% chance of another increase in October. Focus now turns to US inflation and jobs data.

Oil Jumps as Trump Rejects Iran Proposal

Brent climbed above $106 a barrel after Trump rejected Iran’s proposal to reopen the Strait of Hormuz, raising concerns over further delays to oil flows. Trump expects negotiations to resume this week, while Iran said it is awaiting a definitive US response to its seven-day proposal and will not ease its conditions. Saudi Arabia intercepted Houthi drones targeting Riyadh and a missile heading toward Khamis Mushait, with alerts also issued in Abha and Jazan, where Aramco operates energy facilities. Trump is also considering a US diesel export ban to address high fuel prices.

Higher Rates Hit Silver

Silver dropped below $63 an ounce, approaching a seven-week low as stalled US-Iran talks, high oil prices and expectations for further Fed tightening weighed on the metal. Trump rejected Iran’s latest Strait of Hormuz proposal, while Tehran maintained its conditions. Fed officials pointed to resilient growth and a strong labor market as reasons for more hikes, with markets pricing roughly a 66% chance of another increase in October. US inflation and jobs data are next in focus.

Fixed Income

US 10 Year Treasury Note Yield: The 10-year US Treasury yield rose to around 5.2%, its highest since July 2007, as expectations for further Fed tightening strengthened. August capital-goods orders exceeded forecasts, signaling solid business spending, while the University of Michigan survey showed a sharp rise in September inflation expectations. Markets price roughly a 66% chance of an October Fed hike. Treasury Secretary Bessent’s efforts to contain long-term yields through increased buybacks are widely viewed as having had limited effect.
UK 10 Year Bond Yield: UK 10-year gilt yields climbed to 5.4%, near a two-decade high, as BoE officials signaled greater concern over energy-driven inflation. Governor Andrew Bailey said high energy prices could make holding rates harder, while Sarah Breeden and Clare Lombardelli moved closer to supporting a hike. The pressure comes before the October 28 budget as Prime Minister Andy Burnham and Finance Minister John Healey seek to ease living costs. Markets price roughly an 80% chance of a November hike and slightly more than four 25bp increases over the next year.
Japan 10 Year Government Bond Yield: Japan’s 10-year government bond yield climbed toward 3.1%, its highest since 1996, as higher energy prices strengthened expectations for faster BOJ tightening. A former BOJ official said rates could rise for a second consecutive month in October due to inflation risks. July meeting minutes also showed policymakers favoring preemptive action against upside risks, noting that the policy rate remains below the neutral range.
Germany 10-Year Bond Yield: Germany’s 10-year Bund yield settled around 3.5% after reaching 3.57% on Tuesday, its highest since June 2009, as a more hawkish Fed reinforced global tightening expectations. Some analysts argue ECB hike pricing has gone too far, as higher energy costs could weaken growth and inflation. Markets see the deposit rate near 2.9% by December. The BOE held rates steady, while the BOJ raised rates to a 31-year high.

Economic Data

United States Fed Funds Interest Rate

The Fed unanimously raised rates by 25bps to 3.75%-4.00%, its first hike since 2023, citing high inflation. Most officials expect at least one more hike this year, with four projecting two, while Warsh again withheld his forecast. GDP projections for 2026-2027 were raised slightly, PCE and core inflation forecasts increased, and unemployment estimates were lowered to 4.1% for both years.

United Kingdom Interest Rate

The BOE’s MPC voted 6-3 to hold Bank Rate at 3.75%, with three members favoring a 25bps hike to 4%. Middle East tensions and higher energy prices pushed UK CPI to 3.1% in August, with further increases expected. Policymakers see limited second-round wage effects so far but warned of risks if energy costs persist. The MPC also agreed to unwind gilt holdings at £46 billion annually through 2034.

Japan Inflation Rate

Japan’s annual inflation held at 1.9% in August, its highest since December 2025, with gains across food, transport, healthcare and household goods, while electricity prices fell further due to subsidies. Core inflation eased to 1.7%, its first slowdown in four months and seventh consecutive month below the BOJ’s 2% target. Monthly inflation slowed to 0.1% from July’s revised 0.5%.

China Industrial Production

China’s industrial output grew 5.2% year-on-year in August, up from 4.5% in July and above forecasts, led by 6.1% manufacturing growth. Mining fell 1.4%, while computers and communications equipment rose 17.2% and railway and shipbuilding gained 13.4%. Coal mining and non-metallic minerals declined. Output increased 5.3% in the first eight months and 0.54% month-on-month.

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