AFS Markets Blog: Midday 18/09/2026

• Meanwhile in markets, someone wake up the house! Don’t panic, Treasury Secretary Bessent, the 30-year UST yield and crude prices are both holding steady. But that final leg of your infamous trade, the yen, is having a tough morning;

• Yes, the Bank of Japan raised interest rates by 25bps this morning as expected, pushing rates to their highest level since 1995. However, the lack of overtly hawkish messaging has seen the yen weaken throughout the morning. BOJ Governor Ueda’s initial performance during the presser and some verbal jawboning from Finance Minister Katayama provided temporary relief, but it was incredibly short-lived. Since punters realized Ueda wouldn’t provide the hawkish message they hoped USDJPY is back on the move towards the 158 handle – having risen over 150 pips today. Half the work of the joint US-Japanese FX intervention from late July has now been undone;

• Adding to the disappointment for punters, the hike featured two dovish dissents from Toichiro Asada and Ayano Sato. Both are recent appointees of PM Takaichi, a known reflationist who has more seats to fill – with the next spots opening up in the summer of 2027. The real concern is that this will be to replace the board’s top hawks – Hajime Takata and Naoki Tamura. Replacing them with more doves risks creating a structural dovish tilt at the BOJ. While this weighs on the mind of BOJ watchers, Governor Ueda waved off the idea that the board front loading hikes ahead of the replacements coming in during his presser;

• In any case, rate hike expectations for the BOJ have retreated marginally this morning. BOJ-dated TONAR swaps have priced out roughly 2bps of hikes by year-end. That leaves just 5bps of tightening priced in for the October meeting and while conviction around a December move is wobbling slightly it still stands at 20bps;

• Nevertheless, the pressure on the yen isn't just a story of BOJ hesitation – it's equally driven by hawkish FOMC expectations. Fed fund futures fully price in one more hike by year-end – and at 33bps punters are keeping the option open for a second hike to materialize. By the end of next summer, punters now expect a total of three 25bps hikes from the FOMC – essentially matching what is priced in for the Bank of Japan;

• Moving to broader markets, long-end UST yields may well be holding steady today, but the short-end isn’t. Both the 2-year UST and 2-year Bund yield are up 4bps this morning (though still well off the week's highs). For new highs, look no further than the French OAT-Bund spread. The spread now stands at 98bps – a post-Eurozone crisis high. It seems French Finance Minister Lecornu's umpteenth promise to wrangle the deficit down to 5 percent is falling on deaf ears;

• Shifting to equities, the Stoxx 50 is roughly half a percent lower this morning, while S&P 500 futures have ticked a quarter-percent into the green. Over in the US, indices are benefitting from their tech-heaviness, with a sector wide rally. Our AI index – containing hyperscalers and semiconductor firms – is up a full percent today, trading at its highest level since early July;

• Looking ahead, the afternoon promises little excitement. Next week, we should get some geopolitical action from the UN General Assembly – alongside my highlight of the month: the interest rate decision from the Swiss National Bank. The SNB is set to hold its policy rate steady at zero percent – just don’t let President Trump hear that rates can actually go that low;

• Nevertheless, even in Switzerland – where core inflation remains below 0.5 percent YoY - inflation worries are beginning to mount. SARON swaps are now pricing in 10bps of tightening for December, while a hike by March 2027 is fully priced in (and then some, currently sitting at 28 bps). I think this is overpriced – my base case remains that the SNB won’t hike before the summer of 2027. However, the tail risks can't be ignored. Higher energy prices hit Switzerland with a double punch: it is not just direct and second round price pressures – they are currently weakening the franc (which acts as an inflationary force) as other central banks have already been forced to start raising rates. Should a cold winter or further geopolitical escalation spark a 2022-esque energy crisis, an earlier move – even a 50bps hike – is on the table.

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