The Fed and BOJ both raised rates by 25 bps. With rates rising and Warsh maintaining a hawkish tone, bond yields are likely to stay higher for longer, with the U.S. 10Y Treasury yield breaking above 5%. Meanwhile, Saudi Arabia shut an overland oil pipeline following a drone attack, while renewed vessel attacks in the Strait of Hormuz raised concerns over global oil supply and inflation, keeping equities volatile near recent highs. However, Saudi Arabia recently began using smaller shuttle tankers to transfer additional crude to larger vessels via Omani ports, easing the oil rally and supporting a rebound in European and Asian equities later in the week.
U.S. August CPI rose 0.4% MoM and 3.4% YoY, in line with expectations, while core CPI rose 0.3% MoM and 2.4% YoY, above the 2.3% forecast. Persistent inflation prompted the Fed to hike 25 bps, pushing the U.S. 10Y Treasury yield to its highest since 2007. Following the ECB’s deposit-rate hike to 2.50% last week, the BOJ accelerated tightening, raising its policy rate to 1.25% and turning more hawkish. Global bonds initially fell before rebounding as some investors viewed rate-hike risks as largely priced in, with higher yields attracting demand.
The Fed raised rates by 25 bps in September to 3.75–4.00%. The latest dot plot signals room for another 25 bps hike in 2026, rates remaining unchanged in 2027, and gradual easing from 2028. Chair Warsh reiterated the Fed’s inflation-fighting commitment, while significantly more officials favored higher rates than at the previous meeting, underscoring a hawkish stance. However, the projected rate path was less aggressive than the consecutive hikes markets had expected, prompting a positive market reaction.
Japan’s August CPI rose 1.9% YoY as higher oil prices increasingly fed through to consumer costs. Average wages rose 4.7% YoY in July, the strongest increase since January 1997, outpacing inflation and supporting real wage growth. Meanwhile, 2Q GDP grew at a 1.4% annualized pace, beating expectations. Manufacturing PMI improved in August on strong AI and semiconductor demand, while July exports surged 23.2% YoY, the fastest growth since October 2022. Rising inflation and improving economic momentum provided support for the BOJ’s rate hike.
Rate hikes by major central banks in the U.S., Europe and Japan, combined with escalating U.S.-Iran tensions and surging oil prices, have fueled inflation concerns and sovereign debt pressures, pushing government bond yields sharply higher worldwide. Markets are increasingly concerned that high rates and oil prices could weigh on growth, pressuring global equities, bonds and currencies and driving volatility higher, particularly in chips, semiconductors and technology stocks that previously led the rally. Year to date, bond volatility has risen as sharply as equity volatility. Historically, when the VIX and MOVE indices rise, low-volatility and defensive stocks tend to outperform growth stocks, as investors rotate toward more resilient assets.
Over the past quarter, high-beta sectors such as Information Technology, Communication Services and Consumer Discretionary have notably underperformed the broader market. In contrast, value, defensive and low-volatility factors, as well as traditional defensive sectors such as Consumer Staples and high-dividend stocks, have delivered more resilient returns and attracted capital. Following the strong rally in technology and semiconductor stocks in 1H, expectations that high interest rates and geopolitical risks may persist have shifted investor focus toward defensive assets with durable earnings and stronger cash generation.
