Attack the Week (ATW)
Jay, Ueda & September Vibes
Sunday Thoughts
Jay has blinked and turned out more dovish than expected. On Thursday, I shared on the Substack chat that I thought risk/reward for a dovish shift had increased after the market driven by pundits had shifted to expect a more hawkish twist, including changing their tone towards the somewhat forgotten average inflation targeting framework. The resulting market reaction was more of a relief to those fears than the speech itself.
The balance, however, to give a nod towards labour market softness ahead of inflation concerns, is what many are calling a major shift in policy. Remember that the same pundits calling for a hawkish turnout are now deciphering his speech as the decisive turning point. As usual, I am taking things more pragmatically. Yes, labour market conditions have softened, and the consensus now anticipates further revisions to come in September. Markets, however, are never linear mechanisms and there are plenty of conditions that might derail the current consensus, which expects a bit more than 50 bps of cuts this year. To me, there is little edge or attractive asymmetry to such pricing. I have shared with subscribers a SOFR option trade that would benefit from a one-cut scenario this year, which can easily materialise.
I think there are more attractive risk/reward opportunities elsewhere, like the European and UK front-end pricing, which are both expected to ease around 10 bps for the remainder of the year. I will share some trade thoughts on those in due course.
More interestingly, it was Ueda’s speech, which the BoJ governor used to underline how Japan’s labour market has tightened structurally, with wage gains now spreading beyond large corporations to smaller firms. He argued that unless a major negative demand shock occurs, demographic pressures, worker shortages, and rising job mobility will continue to push wages higher. For decades, deflationary expectations kept wage growth muted. Still, the pandemic’s global inflation shock broke that cycle, ushering in an era where Japanese households and firms are beginning to anticipate higher pay as the norm.
On monetary policy, Ueda acknowledged that while domestic demand-driven inflation has not consistently reached the Bank of Japan’s 2 per cent target, wage pressures and food prices are adding persistence to underlying inflation dynamics. He kept a cautious tone, stressing that policy remains data-dependent, but signalled that further rate hikes could be justified if current trends continue. Keep in mind that Japan is running the lowest real policy rate across developed countries. No wonder the JPY is struggling to exhibit a lasting macro trend.
Paper Alfa’s 2025 buy-and-hold portfolio reached new highs on Friday, now tracking a 16.36% YTD return in USD. And that doesn’t include any trading, just pure asset allocation.
Overall, I am expecting September to offer a more volatile environment. Market-implied vol is at very low levels indeed.
What can derail it? Seasonally weaker equity and bond markets tend to disrupt the relative calm of the summer months. Record bond issuance could continue to steepen curves while the TGA rebuild could tighten overall liquidity conditions a bit. Sure, these are all expected and nothing new, but it’s important to keep in mind as we are obsessing over the 25 bps cut by the Fed, which in the larger context doesn’t really change much.
Macro D is travelling, so we will hear from him again in the coming weeks. Below is the calendar for the coming week, as well as the output of the latest asset allocation model portfolio.
Have a great week ahead!