Markets Recalibrate as Fed Governor Signals Patience
TREE NEWS reports: Global equities extended their winning streak to a third session on Thursday as Federal Reserve Governor Christopher Waller signaled openness to holding rates steady if inflation continues to cool. The remarks triggered a sharp repricing in interest-rate futures, with the probability of a September 25-basis-point hike sliding to roughly 50% from about 70% earlier this week.
Asian markets led the advance, with the MSCI Asia-Pacific index climbing 0.8% and Japan’s Nikkei 225 closing 1.3% higher at 65,020.94. Korea’s KOSPI rose 1.64% to 6,687.21, while the won touched its strongest level since July 1, 2025. U.S. equity futures pointed to a modestly higher open, with Nasdaq 100 futures up 0.2%.
Bond Markets React First
The shift in Fed expectations had an immediate impact on fixed income. After a brutal selloff earlier in the week—driven by rising oil prices and hawkish comments from Fed Chair Warsh—yields retreated. The 10-year Treasury yield held near 4.76%, while the 2-year stabilized at 4.34%. In Japan, super-long yields fell sharply, with 20-year and 30-year JGBs dropping about 10 basis points each, and the 10-year yield sliding 6.5 basis points to 2.900%.
Waller’s comments, which cited the recent decline in the PCE price index from 4.1% in May to 3.7% in July, were seen as a potential inflection point. ‘This is very significant because it could shift the balance for the Fed’s next decision,’ said Suresh Tantia, chief investment officer for Asian equity strategy at UBS Global Wealth Management, in a Bloomberg TV interview.
Yen Strength and BoJ Bets
The yen was another focal point, surging about 2% on Thursday to reclaim its steepest one-day gain in months. The dollar-yen pair traded near 156.28, after touching 155.30 earlier. Market participants ramped up bets on a Bank of Japan rate hike, with Nomura’s Yujiro Goto arguing that a 25-basis-point move in September is justified, with further tightening likely thereafter. Japanese authorities were also watched for potential intervention to support the currency.
Commodities: Oil Firm, Gold Slips
Brent crude edged higher to around $95.65 per barrel, on track for its biggest weekly gain since July, as renewed U.S.-Iran tensions raised concerns about supply disruptions through the Strait of Hormuz. WTI rose 0.4% to $91.68. In contrast, spot gold fell 0.3% to below $4,460 per ounce, while bitcoin slipped 0.5% to $81,079.42.
Key Takeaways for Investors
- Rate path uncertainty: Friday’s nonfarm payrolls report and the next inflation print will be decisive for whether the Fed acts in September. Markets are now pricing about a 50% chance of a hike, down from 70%.
- Dovish pivot risk: Waller’s stance suggests the Fed is data-dependent and open to patience, which could support equities and bonds if inflation continues to moderate.
- Yen volatility: The yen’s sharp rally and rising BoJ hike bets could impact carry trades and Japanese equities, particularly exporters.
- Oil as a wildcard: Geopolitical tensions in the Middle East keep energy prices elevated, adding to inflation risks and complicating central bank policy.
- Structural bond pressure: Even with the recent relief, structural factors—large government spending, persistent price pressures, and AI-driven corporate borrowing—keep upward pressure on long-term yields.
Aidan Yao, senior investment strategist at AXA Investment Management, cautioned in a Bloomberg TV interview: ‘With the Fed meeting about two weeks away and U.S. midterm elections about two months out, there is a lot of uncertainty. My personal view is that downside risks slightly outweigh upside, so I think a cautious stance is warranted.’
