Global Economy & Markets, Weekly Roundup 22/09/26
The stock-bond correlation has switched from positive to negative due to the energy shock, suggesting that oil will remain the key factor for both rate and equity markets in the near term
Energy prices remain the key factor for both rate and equity markets. The correlation between movements in oil, equity and bond yields has increased significantly lately.
As a result, the decrease in Brent oil prices by -5% to $100/bl led to a decline in major government bond yields. The UST 10Yr yield declined by 4 bps wow to 4.95% and the German 10Yr Bund yield fell by 6 bps to 3.46%. Euro area sovereign bond spreads narrowed slightly in the past sessions, albeit remain wider by 7-10 bps (Greece, Italy) to 20 bps (France) compared with end-June levels.
Having said that, Greece’s sovereign credit rating was upgraded by one notch to BBB+ by Scope Ratings (stable outlook), while Moody’s revised its rating outlook to positive (Baa3) on September 18th. By contrast, Scope Ratings downgraded France’s sovereign rating to A+ from AA-, with the yield spread of French OATs over Bunds remaining close to 100 basis points, the highest level since 2012.
Global equity markets rebounded, with the S&P500 up +1.9% wow to 7765 and satisfactory gains by Technology (+5.3% wow) and Communications (+2.2% wow), with META increasing significantly (+12% wow, as of Monday 22nd) due to the release of its new personal AI agent Muse.
The Fed increased the target for the Federal Funds Rate (FFR) to 3.75%-4.00%, in its first hike since July 2023. The post-meeting statement noted that activity is expanding at a solid pace and inflation remains elevated. According to Chair Warsh, the Committee removed a “dose of accommodation”. As a result, the case for raising rates further has strengthened.
Indeed, most policymakers expect a rate increase by end-2026, with the median estimate implying one hike of 25 bps to a target range of 4.0%-4.25%. The Fed’s next meeting on October 27th - 28th takes place a week before the US Congressional elections (November 3).
The Committee expects policy rates to remain higher-for-longer. Indeed, the Fed expects less easing going forward (compared with 3 months ago), as the median estimate for the FFR was revised up by 0.5 pps for both end-2027 and end-2028 (to a target range of 4.0%-4.25% and 3.75%-4.00%, respectively). Note that financial markets expect an even higher pace of tightening.
The Bank of Japan increased its policy rate by 25 bps to 1.25%, with the BoJ expressing its intention to hike rates further if necessary. The Japanese yen depreciated over the week (-2.1% to $/¥156.9), reversing part of its appreciation since the beginning of September (+4.1%) as expectations of a faster pace of tightening by the Bank of Japan appear to have been largely priced in by financial market participants, while two BoJ officials voted in favor of keeping rates unchanged.
The meeting of the Presidents of the US Mr.Trump and of China Mr.Xi Jinping in Washington D.C. this week will be closely monitored. Discussions will probably regard a range of subjects, spanning from trade relations (possible extension of the ongoing trade “truce”) and issues related to Artificial Intelligence, to a range of geopolitical matters (e.g. Iran, Taiwan).
On economic data, the focus will be on business surveys for September. Headline composite PMIs are expected to have remained well in expansionary territory both in the euro area (consensus for 51.7 from 52.0 in August) and in the US (54.9 from 56.0) despite a renewed spike in energy costs.
Energy prices remain the key factor for both rate and equity markets. The correlation between movements in oil, equity and bond yields has increased significantly lately.
As a result, the decrease in Brent oil prices by -5% to $100/bl led to a decline in major government bond yields. The UST 10Yr yield declined by 4 bps wow to 4.95% and the German 10Yr Bund yield fell by 6 bps to 3.46%. Euro area sovereign bond spreads narrowed slightly in the past sessions, albeit remain wider by 7-10 bps (Greece, Italy) to 20 bps (France) compared with end-June levels.
Having said that, Greece’s sovereign credit rating was upgraded by one notch to BBB+ by Scope Ratings (stable outlook), while Moody’s revised its rating outlook to positive (Baa3) on September 18th. By contrast, Scope Ratings downgraded France’s sovereign rating to A+ from AA-, with the yield spread of French OATs over Bunds remaining close to 100 basis points, the highest level since 2012.
Global equity markets rebounded, with the S&P500 up +1.9% wow to 7765 and satisfactory gains by Technology (+5.3% wow) and Communications (+2.2% wow), with META increasing significantly (+12% wow, as of Monday 22nd) due to the release of its new personal AI agent Muse.
The Fed increased the target for the Federal Funds Rate (FFR) to 3.75%-4.00%, in its first hike since July 2023. The post-meeting statement noted that activity is expanding at a solid pace and inflation remains elevated. According to Chair Warsh, the Committee removed a “dose of accommodation”. As a result, the case for raising rates further has strengthened.
Indeed, most policymakers expect a rate increase by end-2026, with the median estimate implying one hike of 25 bps to a target range of 4.0%-4.25%. The Fed’s next meeting on October 27th - 28th takes place a week before the US Congressional elections (November 3).
The Committee expects policy rates to remain higher-for-longer. Indeed, the Fed expects less easing going forward (compared with 3 months ago), as the median estimate for the FFR was revised up by 0.5 pps for both end-2027 and end-2028 (to a target range of 4.0%-4.25% and 3.75%-4.00%, respectively). Note that financial markets expect an even higher pace of tightening.
The Bank of Japan increased its policy rate by 25 bps to 1.25%, with the BoJ expressing its intention to hike rates further if necessary. The Japanese yen depreciated over the week (-2.1% to $/¥156.9), reversing part of its appreciation since the beginning of September (+4.1%) as expectations of a faster pace of tightening by the Bank of Japan appear to have been largely priced in by financial market participants, while two BoJ officials voted in favor of keeping rates unchanged.
The meeting of the Presidents of the US Mr.Trump and of China Mr.Xi Jinping in Washington D.C. this week will be closely monitored. Discussions will probably regard a range of subjects, spanning from trade relations (possible extension of the ongoing trade “truce”) and issues related to Artificial Intelligence, to a range of geopolitical matters (e.g. Iran, Taiwan).
On economic data, the focus will be on business surveys for September. Headline composite PMIs are expected to have remained well in expansionary territory both in the euro area (consensus for 51.7 from 52.0 in August) and in the US (54.9 from 56.0) despite a renewed spike in energy costs.