Julius Baer Review Highlights Global Monetary Shifts and Fed Rate Outlook
A Julius Baer review analyzes global monetary shifts, focusing on anticipated U.S. Federal Reserve rate hikes and the Bank of Japan's ongoing policy changes.
A new review by Julius Baer highlights significant shifts in the global monetary landscape, focusing on the U.S. Federal Reserve's handling of inflation and the Bank of Japan's ongoing policy shift. The report features insights from David Kohl, Chief Economist; Afonso Borges from Fixed Income Research; David A. Mayer, Economist; and Louis Chua, Asia Equity Research Analyst.
According to David Kohl, Chief Economist at Julius Baer, the U.S. Consumer Price Index surprised on the upside, driven partly by strong core inflation and rising costs in housing, airfares, and communications. Meanwhile, hawkish remarks by Fed Chair Kevin Warsh and the views of FOMC members are paving the way for a near-term rate hike. The bank estimates that following this hike, the Fed will pause and maintain an upper bound of 4% for interest rates through the end of 2027, assuming underlying inflationary pressures moderate over time.
U.S. Bond Market and Yield Forecasts
At the same time, the U.S. bond market remains in focus. Afonso Borges from Julius Baer's Fixed Income Research notes that a 25-basis-point rate hike—the first in 1,148 days—is already roughly 90% priced into the market. Therefore, attention is likely to shift toward the Fed's economic projections and the dot plot. He suggests that a rate hike without a corresponding update to the inflation forecast could indicate a more hawkish stance by the committee. Additionally, updating the long-term interest rate projection may reveal how Fed members assess the neutral rate in the economy.
Julius Baer's forecast for the yield on 10-year U.S. government bonds stands at 4.6% in three months and 4.3% in 12 months.
The bank also projects a lower interest rate path than currently priced into the money market for 2027 and beyond.
Japan's Monetary Shift and Equity Resilience
Concurrently, the review highlights a significant shift in Japan. David A. Mayer, an economist at Julius Baer, estimates that expectations for a Bank of Japan rate hike to 1.25% at the September meeting contributed to the yen's recovery, whereas the Ministry of Finance's foreign exchange market intervention, totaling 15.4 trillion yen in August, provided only temporary relief. According to the forecast, three additional rate hikes are expected—in December 2026, March 2027, and July 2027—with the USD/JPY exchange rate forecast standing at 155.
Despite the yen strengthening by about 6% to around 154 yen per dollar, the Japanese stock market has demonstrated resilience. Louis Chua, Asia Equity Research Analyst at Julius Baer, notes that the Nikkei 225 and TOPIX indices posted gains, and that Japanese companies are currently less sensitive to exchange rate fluctuations, largely due to significant manufacturing operations outside Japan. As an example, the bank points to Toyota, which conducts roughly 60% of its production outside the country.
Chua also addresses the volatility in semiconductor and AI stocks, which stemmed from broader market concerns following an article by Anthropic CEO Dario Amodei regarding the pace of development and safety issues. Nevertheless, Julius Baer assesses that the long-term fundamentals of the sector remain strong.
Regarding investment strategy, Julius Baer maintains an Overweight recommendation on the Nikkei 225 index with a target of 75,000 points. According to Chua, the investment mix may include technology stocks, defense sector companies, and Japanese bank shares, which stand to benefit from a rising interest rate environment. Julius Baer estimates that interest rates in Japan could reach 2.0% by 2027.
