Will faster BOJ rate hikes trigger a correction in global stocks?

Happy Thursday out there, Team 42. It's your skipper here, Darius Dowell, to present our Macro Minute for Thursday, September 3rd, 2026. Hope everyone's having a great week. So as always, we'll start with the executive summary from today's Lidl morning note, so let's dive right in. Today's key macro question is, will faster Bank of Japan rate hikes trigger a correction in global stocks? The short answer is combined Japanese yen shorts in the futures and options markets, a proxy for Japanese yen carry trade unwind risk, have declined by 63% since a near record extreme in late July. Thus, a faster pace of Bank of Japan rate hikes is unlikely to trigger a row-row phase transition to a risk-off-market regime in isolation, especially if it reduces selling pressure in the U.S. treasury market. Still, more monetary tightening is bullish for bonds, not risk assets, because this will negatively impact funding market liquidity, just probably not by as much as some may fear. And for those who may be unfamiliar, a row-row phase transition just means when you're transitioning from a risk-on-market regime to a risk-off-market regime, or vice versa, from a risk-off-market regime to a risk-on-market regime, that causes the biggest change in positioning across the global buy side. And you typically have, you know, outsized moves in factors, factor leadership changes, you know, asset allocation, and portfolio construction decision-making changes. And so, you know, that's what our process is designed to key on. You know, we're trying to identify those row-row phase transitions as soon as possible so that we can put our buy orders in ahead of the global buy side's buy orders for the things that they're going to buy. So, you know, we're trying to identify those row-row phase transitions as soon as possible so that we can put our buy orders in ahead of the global buy side's buy orders for the things that they're going to buy. for the things that they're going to have to buy when you go from risk-on to risk-off or risk-off to risk-on and vice versa. And so, and obviously, we want to put our sell orders in ahead of theirs when you're going from risk-on to risk-off because, again, otherwise, their sell orders are going to make you poor. You want your sell orders to make them poor, not the other way around. So, as always, wrapping up with a question from our community. This one says, titled, Warsh says, one, less talk, two, no forward guidance. Warsh gave the longest Jackson Hole talk in history. While they're singing like a bird today, while they're singing like a bird today, while they're singing like a bird today, Warsh says, if August CPI is okay, then no rate hike in September. So, just wanted to unpack this. So, a few things here. Can we do better than looking at the last month's inflation print to determine what the price of money should be for not just the U.S., but really the global economy, considering the dollar's status as the world's reserve currency? I got to imagine that looking at the August CPI print, the August 2026 CPI, which, in my opinion, should have absolutely no bearing on monetary policy 12 to 18 months from now, which is the time it takes, the lag that it takes historically for monetary policy changes to impact the real economy. I mean, this is nonsense. What a dumb way to set the price of money for the U.S. and global economy. I think 12 people sitting around and voting on what the price of money should be for the U.S. and global economy is pretty dumb to begin with. I mean, this whole thing, this whole process is asinine. But if we're going to do it, if we're going to do an asinine process, we might as well do the asinine process right. And so, from my perspective, as someone who has the humility to listen to markets vis-a-vis our global macro's matrix, market regime now casting process, our volatility adjusted momentum signal, which we use to infuse dynamic position sizing in KISS, that market regime process we use to infuse volatility targeting in KISS and Dr. Mo. Again, the wisdom of the crowd, the crowd is not always right, but the crowd is almost always more right than any committee could ever be, especially when the community is looking in the driving through the rear view mirror at August CPI to set monetary policy for the end of 2027. Fancy that. So, Mr. Waller, if you're watching, here's something you should probably look at in the spirit of respecting the market and having the humility to listen to the market. This is our market implied R-star model here in this top panel. The upper bound of that model is currently pricing at 1.88%. So, on the high end of the market's range, for R-star, it's at about 1.88%. The green line is the low end of the market's range for R-star. It's at 1.61%. The real Fed funds rate, when you deflate it by five-year, five-year forward inflation swap pricing, is about 1.21%. And so, that means the federal funds rate, the current level of the policy rate on an effective basis, effective real basis, is currently 40 basis points below the low end of the green line, the low end of the market's pricing for R-star. And so, what does that mean? Well, it means the Fed is now modestly accommodative to the tune of one to two rate hikes in terms of having to get back that much policy tightening to get back to neutral. Because again, R-star is not a static thing. The supply and demand of capital, the aggregate supply versus aggregate demand in the economy, those things change over time, which ultimately changes the neutral, the equilibrium price of money. And so, the neutral, the equilibrium price of money on a real basis is gradually rising. It's been rising, it's been rising since the end of February. It's up about 100 basis points on the low end of our range and up about 75 basis points on the high end of the range since the end of February. And so, a federal reserve that does not respond to this market signal is a federal reserve that is willfully allowing itself, its policy setting, to get increasingly accommodative. Again, we have this massive AI capex boom. We have fiscal stimulus all around the world, especially here in the U.S. economy and the Japanese economies. And so, ultimately, there's just this massive aggregate demand, increase alongside a massive aggregate capital demand increase in terms of the supply, taxing the supply of global savings, which has been trending lower over a long period of time. And so, what does this really mean as it relates to your portfolio? So, historically speaking, when the Fed has its policy rate setting in a accommodative setting, as according to when the Fed funds rate on a real basis is below the markets, the low end of the market's estimate for our star, we've seen that in 2008, we saw that in 2018, we saw it in 2018, we saw it in 2022, and we're seeing it now. Historically, you have either an inflation problem explicitly, or you have accelerating inflation. Neither of those things is good from the perspective of today's starting point. And so, ultimately, this is a Federal Reserve that probably does need to, what we've been saying since early June, which is play action pass to set up the run, play action passing, meaning modest tightening cyclically just to eliminate this and get back to neutral in order to appease the bond vigilantes in a way that creates scope, creates some runway next year, for them to ease materially and surprisingly, as it relates to the likely outcomes and recommendations from the five task forces. So that's the run game. The run game is paradigm default for debasement. That's where they want to go. That's where they need to go long-term to contain this natural increase in bond yields. Again, our model, our 10-year fair value model currently has the fair value of the 10-year nominal treasury at about 5.85%. We're currently around 5.85%. We're currently around 4.75% now. So the natural market forces are going to continue to push bond yields higher over time. And eventually the Fed, the treasury is going to run out of shenanigans with the TGA and buybacks. And eventually the market's going to look to the Fed and say, look, you need to do yield curve control or we're going to sell as many of these bonds to you as possible until you do yield curve control. So in our opinion, that's where we think this is all headed. This is why we don't think the bull market in AI, the bull market in stocks, the bull market in general is going to be a big deal. It's over because ultimately we think by the end of next year we'll be in some form of yield curve control as a function of the run game, the run game component of this whole kind of song and dance with the bond market. So Governor Wall, if you're listening, Fed people, if you're listening, I used to meet with you guys on a regular basis. You guys don't like when people are bullish when you know who's in charge, but that's neither here nor there. I'm happy to gift you guys a free 42 macro research description. At the bare minimum, you should know that the market's pricing for our star has gravitated 75% to 100 basis points higher in recent months. If you guys are not aware of that, have no idea how you can credibly set monetary policy. And quite frankly, I think most of the people in the market right now have no idea how you guys are credibly setting monetary policy, hence all the credibility issues and concerns and discussions regarding your policymaking apparatus. So we'll wrap it up there. Darius still here presenting our macro benefit Thursday, September 3rd, 2026. We will catch you back here on Monday. Actually, no, Monday's Labor Day. So I'll catch you back here on Tuesday. Everyone have a wonderful, long holiday weekend. Thanks for tuning in. We'll catch you back here next week. Cheers. If you enjoyed this content, please remember to like and subscribe. Thank you. 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