Opinions

We expect the policy rate to be left unchanged in the 23rd Jan BOJ MPM. BOJ will use this meeting to assess the impact of its latest rate hike on the economy, prices, and financial conditions. BOJ's outlook report will reflect yen depreciation since October 2025 and the government's economic stimulus package. We expect upward revisions to GDP forecasts, particularly for FY26. While we expect the BOJ to lower its CPI forecast for FY26 due to policy effects, we do not expect it to change its underlying inflation outlook. BOJ Governor Kazuo Ueda's post-meeting press conference will be closely watched for any hints on future hikes trajectory. We believe he will continue to avoid taking a hawkish stance in the sense of clarifying the terminal rate or the pace of rate hikes. We believe BOJ is significantly behind the curve and is now caught in a spiral of depreciating JPY, higher fiscal deficits & a still nascent economic revival. JPY depreciation is not only about the Takaichi trade. It is also about how BOJ has missed the bus and how significantly -ve real rates are in Japan. We are bearish on JPY for few months now and expect it to breach 160 sooner than later. Any MoF intervention might give only a brief respite. Eventually we won’t be surprised to see JPY test 185 too (chart below) if BoJ keeps on delaying the rate hikes which we believe is a real possibility. We don’t see the next hike coming before Dec’26 whereas the market is currently pricing in the next hike almost by June’26. On 10yr JGBs, we believe it is eventually headed towards 2.5% by June’26. Currently it is trading at 2.18%. From a political point of view, a general election is widely anticipated in early or mid-February. Campaign issues should crystallize once Prime Minister Takaichi officially calls the election, an announcement that could come as early as next week. Such pre poll promises as well as opinion polls might soon start pushing JPY above 160. There has been some new prepoll alliance formation against Takaichi but her approval ratings are way too high for her to lose the election in our view. Hence the fiscally expansionary policies are likely to remain in place pushing JPY to depreciate further.

We now expect the Fed to close out 2025 with a final 25bps cut. Our earlier call of a Dec hold in absence of macro data had to change after New York Fed Williams comments on 21st Nov which tilted the market pricing in favour of a Dec cut. But this decision will not be unanimous and is likely to feature dissents in both a hawkish and dovish direction. We expect five out of the twelve FOMC members to dissent, with four hawkish dissents against the decision to cut rates (Schmid, Musalem, Goolsbee, and Collins). We also expect Governor Miran to dissent dovishly in favor of a 50bp cut. Powell & a handful of close allies will likely be the swing votes at this meeting. There has been no clear pushback from Powell against the likelihood of a cut raising the probability that he supports additional easing next week. To forge as much consensus for the 25bp rate cut, and thus minimize dissents, we anticipate the statement and Chair Powell’s press conference will signal that the hurdle is relatively high for another cut in early 2026. We believe the December cut will be the final cut with Powell as Fed chair. We now see cuts in June and September 2026 under the next chair. The dot plot is likely to show even greater “tacit dissent,” with 8-9 officials likely to submit a 2025 dot of 3.875% (signalling they preferred no cut at this meeting). The dot plot and economic projections are unlikely to change significantly. We expect the median dot to show one cut per year in 2026 and 2027, with the terminal rate unchanged at 3.125%. On the state of US economy it has been a mixed bag. While UR increased to 4.4% in Sep NFP & ADP private employment contracted 32k in November, weekly initial jobless claims have been subdued. In economic conditions, business surveys have been solid seen in above average PMIs. To summarise, the meeting statement will likely adjust its forward guidance language to imply future cuts are not a given or that the pace of easing is likely to slow. From a market perspective, we expect DXY to strengthen post FOMC on 10th Dec as well as US yield curve to shift higher before the NFP data release on 16th Dec and CPI release on 18th Dec. Our trade reco published on 9th Nov on 10yr UST yield is still active and we are expecting 4.3 levels from the reco yield level of 4.08. Current yield is 4.13. https://macro-spectrum.com/trade-recommendation/sell-10yr-ust US equities might still rise as FOMC description of US economy might remain solid which do not require rate cuts in short term. We are expecting 7000 on S&P 500 by year end as our below trade reco published on 8th Nov: https://macro-spectrum.com/trade-recommendation/buy-sp-500

We have been consistent in our view that US employment is worsening due to AI led productivity growth in US corporates & tariff uncertainties in small & medium business. Our own view on employment is that Oct NFP is it were to be released on 5th Nov as scheduled might have shown UR (Unemployment Ratio) at 4.5% with headline NFP at -25k. But as long as there is no data, we have to agree to Powell’s logic of driving slow in foggy conditions. As long as data is not there, FOMC won’t see the weakness in employment and hence not be motivated for a cut when inflation is still elevated. Hence we now see a December pause as the most likely outcome in absence of US employment data. We continue to expect 3 more consecutive cuts of 25 bps each when ever the employment data resumes. Hence in short term, we are bullish on DXY expecting to test 100.50 & 10yr UST testing 4.20. It was interesting to see the group dynamics at play in Oct FOMC. It appears to us that Powell has no more control on any fraction in the FOMC, whether pro cuts or status quo. The discussion around neutral rates also implies that without employment data at hand, the status quo group wont be agreeing to any further cuts. Powell himself sounded dovish on inflation when he said that tariff-driven inflation would be short-lived, and suggested that tariffs were contributing 50-60bp to current y-o-y inflation. Powell went further to say “inflation away from tariffs is actually not so far from our 2% goal,” echoing dovish remarks from officials like Governors Waller and Bowman. So it is not inflation but employment data which would be needed to bring in more cuts. Moving on to QT, the Committee announced that it will conclude balance sheet runoff on December 1, broadly in line with our expectations. Thereafter the Fed will roll over maturing Treasury securities via non-competitive bids at Treasury auctions, proportional to announced offering amounts, and reinvest MBS principal payments into Treasury bills. The end of quantitative tightening via runoff of the Federal Reserve's assets beginning in December will start the clock ticking toward a resumption of asset purchases in 2026 as Fed liabilities naturally increase. Demand for bank reserves and currency in circulation could force the central bank to begin buying Treasuries as soon as from Jan’26. More Fed bill purchases pave the way for upcoming shift in Treasury funding strategy. Although the Fed’s decision this week to reinvest MBS proceeds exclusively into bills from December onward was modest, it nonetheless aligns with the notion of transitioning towards a shorter maturity SOMA portfolio. We estimate the Fed will purchase $360bn of bills in 2026, with roughly 2/3 of that due to MBS reinvestments and 1/3 due to reserve management purchases.

We expect BOJ policy rate to remain unchanged in the 30th Oct meeting. It will be interesting to see whether other Policy Board members besides Naoki Tamura and Hajime Takata support a rate hike. In the outlook report, we expect upward revisions to both FY25 GDP growth and inflation forecasts, but any such revisions will reflect better-than-expected earnings and yen depreciation, and probably not point to any changes in the BOJ's outlook for the economy or inflation. Expectations for a rate hike in October have receded, in part due to the Takaichi trade. We look for coordination between the new government and the BOJ resulting into a Dec hike by BOJ. We believe that economic indicators released since the previous MPM in September generally justified an October rate hike. In particular, the Tankan survey for September showed an improvement in the business conditions diffusion index (DI) for large manufacturing companies which are relatively strongly affected by tariffs. But the surprise win of Takaichi in local LDP elections meant that Oct hike is now improbable. Takaichi’s broad framework for combating inflation, based on a high-pressure economy approach of proactive but responsible fiscal policy and maintaining accommodative monetary policy, gave rise to stage one of the so-called Takaichi trade: strong equities & a weak yen. Even if the BoJ had considered an October rate hike, it would have been difficult to achieve sufficient communication with the new Takaichi administration by the October meeting. Going forward, while it is a close call between Dec and Jan for the next 25 bps hike by BOJ, we prefer Dec as there are hardly 20 business days between Dec and Jan meetings. In addition, US treasury secretary Bessent & President Trump have time and again pointed out the delayed rate hikes of BOJ artificially depreciating JPY. Also, by 19th Dec, BOJ will have seen if Fed does cut by 25bps in it’s 11th Dec meeting. All these factors lead us to believe that a 25bps rate hike justified for economic reasons and delayed for political reasons shall come eventually in the 19th Dec BOJ meet.

The FOMC will likely deliver a second consecutive 25bp cut at next week’s October meeting along with a dovish dissent from Governor Miran. Powell’s press conference will likely reiterate some easing bias in light of yesterday’s soft CPI prints but Powell might still use the meeting-by-meeting framework for future policy decisions. More importantly we expect an announcement ending QT at this meeting. Recent signs of pressure in funding markets suggest reserves are no longer “abundant,” accelerating the timeline for ending QT and an eventual pivot to reserve management purchases. We expect MBS rundown to continue, with proceeds reinvested into treasury bills. We continue to believe in a front-loaded rate cut cycle by Fed of 25 bps each in the next 4 meetings bringing the terminal rate to 3% by March’26. Inflation is remaining well behaved in spite of tariff pressures on goods prices due to weakening shelter prices. Private employment data is showing cracks all over the place and is likely to show a large -ve no in Oct NFP if it were to be released in early Nov. A lack of meaningful political movement keeps us thinking that the government shutdown will continue into November. In our base case, the government will reopen in mid-November, but the risk is an even more extended shutdown. A mid-November reopening would mean the September, October, and November jobs reports might all be released in late November and early December, adding to volatility in markets. We believe as we move into end CY25, we are likely to see subdued employment nos as companies find themselves facing low consumption trends due to higher prices or consumption sacrifices due to higher prices. For cost rationalisation purposes, companies might tip the balance towards more firings than current state of low firing low hiring. By that time, tariff impact in good prices might have already played out leading to Fed prioritising it’s employment mandate over the price stability mandate.

Our core view on US macros this year has been that upside risks to inflation were being overstated while downside risks to employment were underestimated. Fed officials remain more concerned about persistent above-target inflation than we are, but recent data have convinced Powell and the committee to resume returning rates to neutral. We expect the perceived balance of risks to continue to shift dovish, keeping officials cutting policy rates 25bp at each of the next four meetings. The risk is that policymakers decide either neutral is lower or that rates need to be accommodative, leading policy rates to decline below 3%. Despite the dovish revision to the expected rate path, economic projections were surprisingly hawkish. This suggests a low threshold for delivering additional insurance cuts in the near term and less vigilance on inflation risks. Less emphasis on inflation risks and a likely shift in Fed leadership next year leads us to forecast terminal rate below 3% by mid CY26. We believe the majority of Fed are yet to admit that their inflation expectations for most of CY25 was higher than actuals. For the same reason, the core PCE of CY26 was again revised higher where as it should be lower in our view if we agree that tariff shock is a one-time price effect. In addition, base effects will bring CY26’s core PCE lower than CY’25 core PCE. Hence, we continue to believe front loaded 25bps rate cuts for each of the next 4 meetings. In BOJ, more of the same status quo continued except for a new announcement of a 100year plan of selling ETFs & J-REITs. While the start date for the sales is yet to be determined, the BoJ plans to sell approximately JPY 330 billion (at book value) of ETFs and JPY 5 billion (at book value) of J-REITs annually. However, the pace of sales may be reviewed in the future. As of September 10, the BoJ's holdings of ETFs and J-REITs at book value stood at JPY 37.1862 trillion and JPY 655 billion, respectively. This implies that it would take 113 years to complete the sale of ETFs and 131 years for J-REITs. Also, Tamura and Takata each submitted a proposal for a rate hike to 0.75%. Since the new BoJ Law came into effect in 1998, there have been three instances when some of the policy board members have proposed a rate hike, which was subsequently voted down: July 2000, January 2007, and December 2024. In all these cases, a rate hike was decided at the subsequent meeting. We continue to believe BOJ is far behind the curve and should ideally by 50 bps higher at current levels of output and inflation. While the LDP presidential election on October 4 could also be a hurdle, we now believe it is no longer as high a hurdle, given that the BoJ has demonstrated courage to decide on ETF sales before the presidential election. We believe BOJ will hike by 25 bps in it’s Oct meeting as well as 50 bps in CY26.