Research — 25 August 2026

Verdict

The Fed is likely to stay on hold, but the risk of a hawkish surprise remains elevated given persistent inflation and internal debate.

Analysis

Deutsche Bank's preview highlights that Chair Warsh faces a choice between a big-picture speech or a traditional setup for upcoming action. With inflation elevated for the sixth consecutive year and three dissents in favor of a rate hike at the July meeting, the Committee is actively debating whether tighter policy is needed. Warsh's comments have already triggered a rise in longer-term inflation expectations and bond yields. UBS notes that Warsh signaled a period of 'watchful thinking' and that the FOMC removed forward guidance, implying a higher bar for near-term action. However, the wide dispersion of views and the new chair regime suggest a cautious approach. The key risk is that Warsh uses the speech to prepare markets for a hike if inflation does not moderate, which could further steepen the curve and pressure risk assets.

Tension

DB sees a possible setup for action between September and December, while UBS expects rates on hold for the remainder of the year.

What changed

The July FOMC saw three dissents in favor of a hike, and Warsh's presser raised questions about the Committee's willingness to raise rates.

Desk views

DB outlines two possible speech paths and notes the challenging backdrop of elevated inflation and internal debate, with three dissents at the July meeting.

Evidence IDs · P001

UBS expects the Fed to remain on hold, citing the removal of forward guidance and a higher bar for action, with a pivot to lower rates only in 2027.

Evidence IDs · P017

Investor implication

If Warsh hints at a hike, expect further curve steepening and pressure on equities; if he stays dovish, short-term yields may fall and risk assets could rally.

Trade expression

Consider long 2-year Treasury futures if the speech is perceived as dovish, or short if hawkish.

Invalidation

A clear signal of imminent rate cuts would invalidate the hawkish risk scenario.

Verdict

Buybacks are unlikely to reverse the long-end sell-off on their own, as the market remains focused on fiscal concerns and term premium.

Analysis

ING reports that the Treasury may use its TGA to fund buybacks, but their rates colleagues argue this would not be a big deal for the bond market, as buybacks funded through bill issuance today versus running down the TGA and issuing bills later are largely equivalent. MUFG notes that despite the buyback announcement, yields remain elevated, with the 10Y near 4.72% and the 30Y above 5.2%, suggesting investors remain unconvinced that buybacks can reverse the ongoing long-end sell-off. Morgan Stanley's equity strategy team views the buybacks in the context of their 'Run It Hot' thesis, arguing that higher rates are more a function of strong nominal growth rather than structural concerns around debt and deficit. Thus, while buybacks may provide temporary support, the underlying drivers of higher yields persist.

Tension

Some see buybacks as a signal of fiscal activism that could undermine confidence, while others view them as a technical operation with limited impact.

What changed

The Treasury surprised markets with an increase in its buyback program just two weeks after the Quarterly Refunding Announcement.

Desk views

ING argues that buybacks funded through TGA drawdown are largely equivalent to bill issuance, so the bond market impact is minimal.

Evidence IDs · P011

MUFG highlights that yields remain elevated despite the buyback announcement, indicating skepticism about their effectiveness.

Evidence IDs · P015

Morgan Stanley ties buybacks to their 'Run It Hot' thesis, suggesting higher rates reflect strong nominal growth rather than debt concerns.

Evidence IDs · P014

Investor implication

Expect continued volatility in long-end yields; buybacks may cap yields temporarily but not reverse the trend.

Trade expression

Consider steepener trades if buybacks fail to bring down long-end yields.

Invalidation

A significant decline in yields driven by buybacks would suggest a shift in market perception.

Verdict

The summit will likely reinforce managed competition, with trade tensions persisting and November 10 policy expiries a key risk.

Analysis

Morgan Stanley's Weekly Worldview argues that the September summit should reinforce managed competition, not deliver a breakthrough. The May meeting produced sector-specific agreements but left larger structural issues unresolved. The framework of stabilization, not normalization, remains useful. Clear trade tensions remain, and on November 10 three temporary measures expire simultaneously: the Section 301 exclusion list, the BIS suspension of the Affiliates Rule, and China's Wave 2 rare earth controls. Additionally, China's export licensing on heavy rare earths remains in force, with yttrium exports to the US down 70% from January 2025 levels. The summit will provide insight into whether re-escalation is a risk or if the current path continues.

Tension

Optimists see concrete outcomes from engagement, while pessimists see limited scope; the summit's value is in testing the framework's durability.

What changed

The May summit produced commercial agreements but no resolution on structural issues; November expiries approach.

Desk views

Morgan Stanley emphasizes that the summit matters less for major announcements and more for whether the managed competition framework holds.

Evidence IDs · P013

Investor implication

If the summit fails to prevent escalation, expect renewed pressure on trade-sensitive assets and risk sentiment.

Trade expression

Consider hedging trade exposure via options on export-oriented sectors.

Invalidation

A surprise breakthrough on trade would be positive for risk assets.

Verdict

Inflation expectations are at most modestly elevated and not at immediate risk of unanchoring, but dispersion and perceived persistence remain concerning.

Analysis

Goldman Sachs' US Economics Analyst examines inflation expectations after five years of high inflation. They draw three lessons: expectations influence price and wage setting, so anchoring matters; expectations are primarily driven by experienced inflation; and monetary policy plays a limited role in anchoring because households and firms are inattentive to the Fed except when inflation is very high. Their composite measures suggest long-term household expectations are back to mid-2000s levels, while short-term business and household expectations are somewhat elevated. However, dispersion of expectations and perceived inflation persistence remain high, though surveys disagree. On net, they see expectations as modestly elevated, with downward pressure expected next year if inflation returns to target.

Tension

NY Fed data suggest younger cohorts' expectations have aligned with older generations, but other signals like dispersion are concerning.

What changed

The oil shock this year has rebounded short-term expectations, but long-term expectations remain anchored.

Desk views

Goldman Sachs concludes that inflation expectations are not at immediate risk of unanchoring, but warns that dispersion and persistence remain high.

Evidence IDs · P009

Investor implication

If expectations remain anchored, the Fed can afford to be patient; if they drift higher, the risk of a policy mistake increases.

Trade expression

Consider breakeven inflation trades if expectations show signs of unanchoring.

Invalidation

A sharp decline in inflation expectations would reduce the urgency for Fed action.

Verdict

The outlook for gold is constructive, supported by strong ETF inflows, recovering financing demand, and USD weakness.

Analysis

UBS's Bullion Report notes that gold's outlook has become increasingly constructive, supported by strong futures positioning, continued ETF inflows, US fiscal and debt concerns, dollar weakness, persistent inflation risks, and reduced expectations for near-term policy easing. Investor sentiment has shifted meaningfully, with growing interest from hedge funds. However, participation has not fully matched the rally's strength, with futures markets driving the advance rather than OTC channels. ETF demand remains one of the strongest supportive factors, with buying consistent throughout the rally. MUFG's historical analysis suggests caution in extrapolating debasement fears, as extreme readings in similar episodes were not followed by persistent USD weakness, and gold frequently corrected over the subsequent one to three months. Thus, while the trend is supportive, a pullback is possible if yields remain elevated.

Tension

UBS is constructive on gold, while MUFG warns that historical patterns suggest gold may consolidate or correct if yields stay high.

What changed

A numerical detail was omitted because its cited evidence did not support it exactly.

Desk views

UBS highlights improving sentiment, strong ETF inflows, and USD weakness as key supports for gold.

Evidence IDs · P018

MUFG cautions that historical episodes of debasement fears often led to gold corrections, not sustained rallies.

Evidence IDs · P015

Investor implication

Gold may continue to benefit from dollar weakness, but a reversal in yields could trigger a correction.

Trade expression

Consider long gold futures or gold miners as a hedge against dollar weakness.

Invalidation

A sharp rise in real yields would undermine gold's appeal.

Verdict

Equity markets are supported by strong earnings revisions, but seasonal patterns and factor rotations suggest a preference for large-cap quality.

Tension

UniCredit is constructive on equities based on earnings, while Morgan Stanley's quality rotation implies a more selective approach.

What changed

Earnings revisions for 2027 are moving higher, a rare and positive signal.

Desk views

UniCredit highlights that upward revisions to 2027 earnings estimates provide a strong indication that the earnings cycle remains healthy.

Evidence IDs · P020

Morgan Stanley advocates for large-cap quality and AI adopters, with Energy as a hedge against oil risk.

Evidence IDs · P014

Investor implication

Investors should favor quality and defensive sectors while remaining alert to seasonal volatility.

Trade expression

Consider overweighting large-cap quality ETFs and underweighting high-beta momentum.

Invalidation

A sharp deterioration in earnings revisions would undermine the bullish case.

Verdict

The CNY is expected to appreciate further, with UBS forecasting USDCNY at 6.60 by year-end and 6.50 by mid-2027.

Analysis

UBS's 'Watching the fix' note highlights that PBoC-guided appreciation continues to push USDCNY to fresh multi-year lows. Export-driven FX inflows remain a powerful support for the CNY despite weak domestic growth conditions. The PBoC's tolerance for CNY strength is a key variable, and they continue to signal this through the daily fixing mechanism. UBS maintains an Attractive rating on the CNY, supported by strong balance-of-payments dynamics and scope for broader USD weakness. The latest Chinese data show a mixed picture, with industrial production expanding at a low- to mid-single digit pace, retail sales subdued, and fixed-asset investment contracting, but the external sector remains a bright spot with a trade surplus of USD 112 billion in July. The PBoC's willingness to allow appreciation is crucial, especially amid domestic weakness.

Tension

Weak domestic growth could argue for a weaker currency, but the PBoC's policy tolerance and external surpluses support appreciation.

What changed

USDCNY recently reached a 3.5-year low of 6.72.

Desk views

UBS expects further CNY appreciation, driven by PBoC guidance and strong external balances, despite domestic weakness.

Evidence IDs · P019

Investor implication

CNY strength may continue, benefiting CNY-denominated assets and pressuring USD.

Trade expression

Consider long CNH or short USDCNH to express the appreciation view.

Invalidation

A shift in PBoC policy to allow depreciation would invalidate the bullish CNY view.