Till last week we were of the view that Fed might remain on hold for REMCY26 as we expected core PCE to be in the range of 0.1-0.2% MoM from June through August as progress toward’s the Fed’s 2% inflation goal. But after seeing this week’s PPI data and CPI data, we now expect the core PCE to come at 0.28% MoM for August. This implies a reversal in disinflationary momentum & hence our view has changed to a 25-bps hike in the 16th Sep meeting as well as the 9th Dec meeting. Chair Warsh’s hawkish turn in his Jackson Hole speech, elevated August core PCE inflation estimates, and the recent spike in crude oil prices justify policy tightening. The dot plot is likely to be revised higher than in June, with the median 2026 rate expectation suggesting two rate hikes in total this year. Chair Warsh downplayed the relatively benign inflation prints for June and July at his Jackson Hole speech. A reacceleration in August will likely lead him to take a hawkish action. Recent spikes in crude oil prices also pose an upside risk to the inflation outlook. In addition, media reporting in early August suggested that Warsh would be prepared to raise rates if market expectations for tightening rises significantly. The market pricing for a hike in September is around 90% at the time of writing, meaning a dovish surprise could add to volatility for a rates market which already appears sensitive to inflation risks and Fed credibility concerns. Also as long as US equities remain well bid, we do not expect any meaningful retracement in long end US yields unless there is an oil deal. From a market perspective, we were stopped out on our 1yr-1yr SOFR received trade this week. We don’t have any strong views on the rates market at current levels but might take a fresh look after the FOMC. In Fx, we continue to remain bullish on JPY and look for it to end CY26 at 152 levels.
