Pressures From Tokyo Send Yields Soaring, Overwhelming The Positive Effects of Much Cheaper Oil : Sept. 18, 2026

Yields are soaring for a different reason to culminate the week, as the yen plunged after the Bank of Japan hiked against the backdrop of observers perceiving that Governor Kazuo Ueda wasn’t hawkish enough. Moreover, the quarter-point increase wasn’t a unanimous decision, as two board members dissented in favor of a pause. The depreciating currency created a headwind for US bonds because Tokyo is the largest foreign holder of US Treasuries, and weaker tender there incrementally compels the nation’s officials to sell Washington’s debt to raise hard cash in order to intervene in the FX market and play defense. In response, the greenback is strengthening while the curve is climbing in bear-flattening motion by about 5 to 8 bps led by the monetary policy short-end, with a 6% decline in crude oil down to around $95 per barrel failing to offset today’s bond headwinds for a change. The jump in rates is hurting stocks, too. Every major benchmark and the 11 principal sectors are declining on the session. The selling pressure is modest, however, with volatility protection instruments being flat, indicating subdued hedging demand as investors gear up for the possibility of good Middle East news this Tuesday at the UN General Assembly, during which President Trump is scheduled to meet with Gulf leaders to try and create a plan that would bring peace to the region. The commander in chief, or his administration at least, has also been active in the cryptocurrency space, as Bitcoin and Ethereum rally over 6% in reaction to the SEC and CFTC making efforts to legitimize digital asset infrastructure subsequent to the Clarity Act’s inability to clear a key procedural hurdle in the Senate three days ago. Elsewhere, non-energy commodities excluding lumber are advancing and prediction markets are catching bids.

In a Surprise, Industrial Output Decelerated During August

Industrial output last month unexpectedly decelerated with the business equipment and construction categories, which include artificial intelligence support activities, leading the softness. The numbers could point to soaring energy costs and heavier input charges slowing the development of the modern technology. The overall print was flat m/m and it arrived below both the economist consensus forecast for a 0.3% ascent and July’s 0.2% uptick. Relative to the year-ago period, production still rose 1.4%, better than July’s 1.1%. The construction segment, which has benefited from a tailwind of groundbreaking of large data warehouses and AI facilities, contracted 0.7% m/m. Similarly, the business equipment category sank 0.5%. In this area, demand has been supported by companies implementing AI capabilities. The broad manufacturing industry also weakened, falling 0.3% m/m. On a positive note, utilities, materials and mining results climbed 1.8%, 2% and 0.1%.

Focus on Bond Fundamentals

Fixed-income fundamentals are improving today even as much cheaper oil fails to stymie the session’s Treasury selloff. With core inflation at 2.4%, energy is quite frankly the only meaningful variable that has headline price pressures running above 3%, and more progress on the geopolitical front is poised to drive a significant bond rally, potentially helping equities as the seasonal dynamic flips from unfavorable to positive in the upcoming weeks. Meanwhile, Fed hike odds are way too elevated at this juncture, as Wall Street should except Chair Warsh to turn increasingly dovish from the hawkish posture he demonstrated just a few days ago. This change is likely to occur as he seeks to balance the central bank’s focus on quelling cost forces while supporting the hiring cycle and financial stability. We could be in for a challenging backdrop in the near term if Japan’s volatility continues to spread across the pacific to the US, however, buoyant corporate earnings momentum, ongoing economic growth and probable improvements in Middle East dynamics warrant bullish position from here into year-end for stocks and credit in my opinion.

International Roundup

Bank of Japan Hikes as Core Inflation Eases Slightly

Citing the inflationary one-two punch of a weak yen and soaring energy costs, the Bank of Japan last night hiked its key interest rate 25 basis points (bps) to 1.25%, its highest level since 1995. The central bank’s decision came shortly after the release of the August National Core CPI depicted inflation easing marginally from 1.8% y/y in July to 1.7%. Economists anticipated a repeat of July’s rate. The gauge excludes energy and other items with volatile prices. The headline metric, nevertheless, remained unchanged from July’s 1.9% y/y but the month-over-month (m/m) result slowed from 0.5% to 0.1%. In discussing the widely expected decision to hike, BOJ Governor Kazuo Ueda warned that inflation could easily exceed the organization’s 2% target and that limiting price pressure is essential for the credibility of the country’s currency. While Ueda said he will support additional rate increases if needed, the opposition of two policymakers to last night’s decision caused some investors to question the BOJ’s resolve to aggressively tighten monetary policy if inflation doesn’t ease, which caused the yen to sink to a two-week low relative to the US dollar. The Japanese currency recovered some of its loss in response to Ueda’s comments.

South Korea Wholesale Price Pressures Strengthen

The preliminary South Korea Producer Price Index climbed 0.2% m/m in August after falling by 0.4% in the preceding month. It was also up 7.9% y/y following July’s 7.7% print. The agricultural, forestry and marine products category had the largest impact on the m/m print. After climbing only 1.5% in July, it posted a 3.8% ascent. In this segment, marine foods were nearly flat, climbing only 0.1%, but agricultural foods and livestock products were 4.9% and 2.8% more costly than in the preceding month. In other areas, the electric power, gas, water and waste group climbed 0.9% while services and manufacturing products were both flat. In manufacturing, the impact of computers, electronic and optical equipment, coal products and petroleum products and the group consisting of food products and beverages experiencing sticker increases of 0.3%, 0.4% and 0.3% was offset by declines in chemical products and basic metal products. Among services, accommodation and food became 0.6% more expensive and real estate activities climbed 0.2%. The transportation subcategory, information, telecommunication and broadcasting services and financial and insurance activities, however, fell by 0.2%, 0.1% and 1.5%.

Decline of Foreign Direct Investment Into China Continues

The decline of foreign investment into China eased somewhat in August but nevertheless extended the long contraction of capital flowing into the world’s second-largest economy. Foreign direct investment sank 5.3% y/y following July’s 6.2% contraction. China’s ongoing struggles with excess capacity and weak domestic demand have contributed to FDI shrinking every month since May 2023. 

UK Retail Sales Pick Up and Beat Expectations

August retail sales in the UK were surprisingly strong with the volume of purchases jumping 0.5% m/m and 2.4% from the year-ago period, according to estimates from the Office for National Statistics. Activity bounced back from July, which produced a 0.5% m/m contraction and a 1.2% y/y expansion. August also outpaced the economist consensus expectations for a 0.2% m/m decline and annual growth of 1.9%.

Broadly speaking, promotional discounts in June pushed forward purchases, causing July results to soften. The weak July results created a positive base effect, or a low comparison for activity in August.

The following categories and the extent of their growth contributed to the m/m expansion:

• Department stores, 1.8%
• Non-store retailing, 1.7%
• Household goods stores, 1.2%
• Textile, clothing and footwear stores, 1.1%
• Food stores, 0.3%

The volume of automotive fuel, however, sank 1.3% as consumers sought to minimize pain at the pump.

July Euro Area Construction Matches June Output

Construction output in the euro area during July was stable when compared to June’s production, according to Eurostat. Building construction was unchanged while civil engineering grew 0.6%. Output of specialized construction, however, sank 0.1%.