Two hikes but one split decision

BoJ hikes as expected, but the yen weakens as split vote reduces expectations of further hikes. Chinese yuan hits its strongest level since 2022 against the dollar. Gold bouncing back late in the week after three weak sessions on the trot. Oil retreating as supply fears ease, but for how long? Equities liking it for now, thanks to the reduced pressure on consumer prices. Equity markets also liking a return to credibility for the Fed, but what pressures will El Niño exert? Clarity Act failing to pass the Senate once again, weighing on crypto prices. Read on for details and a preview of what will move markets next week.

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Dovish hike in Japan

Following a two day meeting in Tokyo, the Bank of Japan confirmed that it would be hiking interest rates to 1.25%. A second hike no blocked in confirms the shortest interval between increases in Japan since 1990. On top of inflationary forces, questions remain over how much influence on the decision was exerted by the US, in particular Treasury Secretary Scott Bessent. Governor Ueda refused to comment on what was discussed at their recent meeting.

While reiterating that rates would likely continue to rise from here, market participants focussed instead on the fact that it was a 7-2 split vote this time around. That dovish signal of dissension in the ranks outweighed the hawkish rhetoric from Governor Ueda and others. As a result the yen weakened, USDJPY sliding to 157.33 shortly after the announcement. Swap markets are now pricing the chance of another hike in December at 85%. What will S. Bessent have to say about the situation now? That will likely be largely determined by movements in USDJPY in the coming days and weeks.

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Fed hikes rates and credibility

Earlier in the week, the Federal Reserve raised rates for the first time in over three years, in a unanimous decision. While choppy at first, after digesting the move and subsequent commentary, market participants that the hike was a positive. Bond yields pulled back from an historic run. And stocks pushed steadily higher in the following trading sessions. In essence, confirmation of the hike was seen as a win for credibility, and proof that new Governor Warsh is willing to go against Trump’s incessant jawboning in the opposite direction.

The battle with inflation is not over yet though of course. Aside from the pressure exerted by oil markets on consumer prices, another factor coming increasingly into focus is a “Super" El Niño. If current forecasts are accurate, prices of everyday staples will increase in coming months and worse we could see supply shocks on the back of record temperatures and their effect on crops.

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Next week

President Xi Jinping will make his first visit to the US since 2023, for a summit with President Trump. Tim Cook and Sam Altman are reported to be among invited guests at a state dinner. On the agenda will be the flow of rare earths, AI, the war in Iran, and of course most notably tariffs. The announcement of new tariffs has been postponed until after the summit. An advance party from China has already headed to the States to commence negotiations. Elsewhere, we will be watching for unemployment figures in Australia, the SNB rate decision and Initial Jobless Claims in the US.

Costco is the one earnings release of note, with Q3 reporting season around the corner. Go well out there.