Newsletter · · Ashutosh Agarwal

The Rate Cut Era Is Over and Hikes Are Back - Global Macro - Week of July 23, 2026

Global macro newsletter for the week of July 23, 2026. The world's central banks stopped counting rate cuts and started counting hikes: the ECB is odds-on to lift again in September, Britain's new prime minister got a bond-market warning shot with gilts at 5%, and a fresh energy spike is the common fuse, even as America posted its softest inflation in years.

Global Macro

Week of July 23, 2026: The Rate Cut Era Is Over and Hikes Are Back

A few months ago, the parlour game across every macro desk was counting rate cuts. How many would the Fed deliver this year? Three? Four? This week the game flipped completely on its head. The question now, in Washington, in Frankfurt, and in London, is how many rate hikes are coming. The European Central Bank has already raised rates once this year and is odds-on to do it again in September. Britain is staring at 5% borrowing costs, a brand-new prime minister, and its ninth chancellor in a decade. And the whole turn happened even though America just reported its softest inflation in years. The common thread pulling all of this together is a fresh spike in energy prices, courtesy of renewed fighting around the Strait of Hormuz. Here is what the podcasts actually said this week.

TL;DR

  • The world's central banks have stopped talking about cuts and started talking about hikes. Morgan Stanley points out the ECB has already raised rates once this year and forecasts another hike in September. J.P. Morgan and Bank of America agree September is the base case. The trigger: energy prices whipping back up as the Middle East reignites.
  • America's inflation report was shockingly soft, and the dollar hardly cared. US consumer prices posted their biggest downside miss versus forecasts since 2022, with the "core" reading actually falling. Yet Fed officials kept talking tough, one strategist called the hawkish shift "the most hawkish since 2022," and the dollar barely moved.
  • Britain is the week's problem child. The 10-year gilt yield touched 5% for the first time since 2008, new PM Andy Burnham had to walk back a line about not wanting to be "in hock to the bond market," and the country now spends more servicing its debt (over £100bn a year) than it does on its entire education system.
  • Carry is "the only game in town." With currency market volatility at a five-to-six-year low, J.P. Morgan's models say the one trade that still works is borrowing cheap currencies (yen, Swiss franc) to buy high-yielders, with the Colombian peso doing most of the heavy lifting. The one thing that could blow it up: a sudden move in the Japanese yen.
  • Japanese bonds keep flashing amber. The 10-year Japanese government bond yield hit a 30-year high, and the big worry is that Japan's giant pension fund starts pulling money home, which would strengthen the yen and could unwind the carry trade in a rush, the way it did in the summer of 2024.

What's new

1. The single biggest shift of the week: everyone stopped counting cuts and started counting hikes. The clearest statement of this came on Morgan Stanley's Thoughts on the Market (Jul 21), where the firm's global economics team sat down together. The line that stood out was from Jens Eisenschmidt, their chief Europe economist, reminding everyone that the European Central Bank "has already raised interest rates once this year," and that his forecast is for it to hike again in September.

Here is the part that makes this less scary than it sounds. Eisenschmidt argues the ECB is simply running "neutral" policy, rates that neither speed up nor slow down the economy, currently at 2.25%. The bank's own estimate of neutral runs from 1.75% to 2.5%. So, as he put it, even if the ECB lifts rates to 2.5% in September, "you could go with the microphone around the governing council and you would probably find a lot of people saying, well, this is still neutral policy." In plain English: Europe is not slamming on the brakes, it is just taking its foot slightly off the accelerator. But the direction of travel, he stressed, "is still higher."

The US side of the same conversation was the mirror image. Morgan Stanley's chief US economist Michael Gapen is actually out of consensus in the dovish direction, he thinks American inflation has already peaked and will fall to around 3% by year-end, so his forecast is that the Fed "doesn't change policy at all this year." But even he conceded the risk: if inflation "just lingering at elevated levels" refuses to come down, "the Fed gets brought in to raise rates in September or later this year." When the dovish economist's downside scenario is a rate hike, you know the mood has shifted.

2. And yet US inflation just came in shockingly soft. This is the genuine puzzle. On J.P. Morgan's At Any Rate (Jul 17), FX strategist Patrick Locke walked through just how weak the June inflation report was: "core goods fell 10 basis points. Core services was flat. And kind of surprisingly, super core was also negative at 20 basis points, which was basically the first time it contracted since March of 2025." ("Super core" strips out food, energy, and housing, it is the cleanest read on underlying price pressure.) He called it "basically the second biggest disappointment relative to consensus going back to the start of this cycle," made worse by a soft producer-price report the next day and a jobs number that added only 57,000 positions.

Normally that combination knocks the dollar down and revives hopes of rate cuts. It did not. Locke's colleague Meera Chandan, who co-heads FX strategy, explained why: the Fed has undergone "a bit of a regime shift." Using the firm's hawk-versus-dove scoring of Fed officials' comments, she noted the two-week swing toward hawkishness was "the most hawkish since 2022," driven by Dallas Fed president Lori Logan suggesting "modestly higher interest rates" and new Fed chair Kevin Warsh insisting "he's not going to overreact to one print." Her conclusion: it is "too early to throw in the towel on the bullish dollar view, at least prior to the [end-of-July Fed meeting]."

Why it matters for anyone holding a currency: the dollar is being held up not by actual inflation, which is falling, but by the fear of Fed hikes. A soft inflation print did not kill that fear, so the dollar kept its floor.

3. Britain got a new prime minister, and the bond market immediately tested him. Andy Burnham was sworn in as UK prime minister on July 20, the fourth of King Charles's short reign, as the hosts of PensionCraft's Many Happy Returns (Jul 22) dryly noted. Burnham had given an interview to the New Statesman sketching out a classic left-of-Labour agenda, large-scale council-house building, renationalising water and energy, higher taxes on top earners, and, most provocatively, said Britain needed to get "beyond being in hock to the bond market."

The bond market's response was swift. As co-host Michael Pugh put it, Burnham "said, we don't want to be in hock to the bond markets. And then the bond markets had a bit of a wobble about him saying that, which is what got him to throw back on his words." Burnham quickly pledged to stick to the existing fiscal rules and, tellingly, sought advice from Richard Hughes, the former head of the government's fiscal watchdog, "about how not to spook bond markets."

The numbers behind the nervousness are stark. The 10-year gilt yield touched 5% this week, "the first time since 2008 that it's touched that 5% level." UK government borrowing in May was £23bn, the second-highest on record for the month, and running about £9bn above the official forecast for the year so far. And the bill for simply servicing the existing debt is set to exceed £100bn this year, roughly £109bn, which, as the hosts pointed out, "is more than the entire education budget."

Whereas after September 2022, gilts suddenly started to pay attention to what British politicians were doing.

That is the real legacy of the 2022 Liz Truss "mini-budget" crisis, and the episode put a number on it using a June IMF study: before that crisis, the relationship between UK political uncertainty and the extra yield investors demand to hold long-term gilts was "statistically zero." After it, a one-standard-deviation jump in policy uncertainty adds about 4.6 basis points to that premium. The hosts have a nickname for it, the "moron premium," and the point is that markets take a long time to forget when politicians frighten them.

4. The chancellor merry-go-round told its own uncomfortable story. On Bloomberg's Merryn Talks Money (Jul 17), Merryn Somerset Webb and John Stepek marvelled that Britain is now on roughly its ninth chancellor in ten years. The favourite for the job had been Ed Miliband, right up until a Bloomberg reader survey named him the least market-friendly candidate, at which point the odds swung to Shabana Mahmood, and gilts and the pound got a small relief bounce on the news. What unsettled them was that the survey merely stated the obvious. As Somerset Webb put it, if that was "new news to an incoming Prime Minister when it is not new news to anybody else... that, for me, is quite scary and bodes really badly for the next few years." It is a small anecdote, but it captures the fiscal-credibility question hanging over sterling.

The debate

On one side: this is the start of a genuine hiking cycle, and the dollar stays firm. The energy shock is the engine. On J.P. Morgan's European rates podcast, At Any Rate (Jul 17), strategist Gendrik Gupta explained that market pricing for ECB hikes "repriced sharply higher over the last two weeks as the U.S.-Iran truce collapsed," and that the market is now unusually sensitive to natural-gas prices rather than oil. Bank of America's Global Research Unlocked (Jul 17) is firmly in this camp on both continents: it expects the ECB to hike in September, and its US team still looks for the Fed to hike in September and deliver 75 basis points of total increases this year, arguing that chair Warsh is "doubling down on this commitment to bring inflation to 2%" and "politically... doesn't want to own this issue" of persistent overshoot.

On the other side: the hawks are over their skis, and the fuel is running low. The most careful pushback came from J.P. Morgan's own rates team. Gupta himself said the market's cumulative hike pricing is "borderline too high," noting that it is "broadly in line with what was priced in when oil was trading close to $100 per barrel," even though oil has since fallen back. His colleague Aditya Chaudhia holds a "strategic bullish duration bias" on German government bonds (betting yields fall), calling the recent sell-off "excessive." Bank of America splits the difference in a way worth holding onto: it sees a September hike, but then the ECB "will have to cut rates quite meaningfully so over 2027 and 2028" as inflation falls faster than the bank expects. In other words, this week's hawkishness may be the last gasp of tightening, not the first of many.

And the loudest bear thinks the whole edifice is about to crack. On The Julia La Roche Show (Jul 21), veteran investor George Noble argued the global "liquidity cycle has turned," surging government deficits and a global capital-spending boom are all competing for the same pool of money, at a time when sticky inflation gives central banks little room to print more. His warning on the Fed: if Warsh really tightens into America's enormous borrowing needs, "the bond market is going to implode and take equities with it," and ultimately Warsh "will blink... he'll ease. He'll have to." It is a pundit's macro call rather than an operator's, but it is the sharpest version of the "something breaks first" argument.

Trades in play

  • Carry is, in J.P. Morgan's words, "the only game in town." On the firm's Global FX podcast, systematic strategist Antonin Dallaire made the case cleanly: currency-market volatility (his "VIX for currencies") is at a "five or six years low," and in that kind of sleepy market there is little reward in anything except earning the interest-rate gap between currencies. A simple basket that goes long the five highest-yielding currencies and short the five lowest is "up 3-4% since the beginning of June," though he was honest that "two-thirds of the performance is coming from the long Colombian peso position only." The short side of that trade is exactly the funders this newsletter tracks: "short yen, Swiss, low yield Asia or CAD."
  • The rich-world version of carry is really a bet on oil. Dallaire noted that in the G10 specifically, carry "is very exposed to oil moves" because it means being long high-yielding commodity exporters against the franc and the yen. So this is not a free lunch, it is a leveraged view that energy stays firm and volatility stays low.
  • In rates, J.P. Morgan likes betting on lower European yields, carefully. Rather than fighting the hawkish repricing head-on, Gupta favours expressing a "lower yields" view "via options or other proxies, such as swap curve steepeners," and Chaudhia likes owning duration in 10-year German Bunds now that yields sit at the top of their 280–315 basis-point range.
  • The freshest tactical warning is on the yen. Dallaire's one flagged risk to the whole carry complex: "a knee jerk in yen could potentially trigger a broader risk pricing of the carry complex." The through-line across every yen discussion is the same as prior weeks, the pair keeps grinding weaker, but the risk of a sudden reversal makes an outright short dangerous, so defined-risk options are the way to sleep at night.

Read-throughs

  • Japan's pension fund is the swing factor nobody controls. This was the most-discussed mechanism of the week. Bank of America's Tokyo strategist laid out the scenario: if Japan's giant public pension fund (the GPIF) shifted just 5 percentage points out of foreign bonds and back into Japanese ones, that is roughly ¥21 trillion of new demand for Japanese government bonds, "larger than one month [of] net JGB supply," and about $130bn pulled home. His careful framing: "we're not predicting it, but if it were to happen, it would be supportive for the yen and even more supportive for the JGBs." On Merryn Talks Money, John Stepek put the darker version plainly: Deutsche Bank has flagged that repatriation could reach up to 10% of Japan's GDP, and "if that suddenly reverses, then a whole load of money could come out of various assets, including hot tech stocks."
  • The euro's weak spot is French bonds, not the euro itself. Bank of America's Europe strategist noted that if that Japanese money does come home, the selling of European bonds would be modest overall, but it would land hardest on France, "where we are also facing increased now uncertainty on the political, budgetary, and rating side." Both Merryn Talks Money and the J.P. Morgan rates team singled out French government bonds as the vulnerable link. Peter Boockvar, on the ITM Trading Podcast (Jul 17), added the data point: France's 10-year borrowing cost "traded at a 17-year high" this week.
  • Watch the VIX if Japan ever acts. On RenMac (Jul 17), answering a listener asking about a repeat of the August-2024 volatility spike, the team said the yen is "in the zone that they historically do something" on intervention, but there is "no indication that they're willing to do something" yet. Their sharp read-through: if Japan does move, it becomes "a macro event," and if it is a macro event, "then the VIX looks to be cheaper," i.e. stock-market calm is underpricing that tail risk. They also made the case that today's carry trade "has a lot less force" than three-to-five years ago, because interest-rate gaps have narrowed and the cost of hedging the currency has become "very, very high."
  • Japanese and European bonds are dragging on US Treasuries and gold. Boockvar tied the threads together: with the 10-year Japanese yield at a 30-year high and Japan the largest foreign owner of US Treasuries, any repatriation "could lead to dollar weakness and eventually... gold strength." But not yet, he showed that the US 10-year yield has climbed from 3.94% (the Friday in late February before the Middle East conflict flared) to 4.53% now, a 60-basis-point rise that is entirely a real-rate move, and "that real rate... has been a major headwind for gold." For all the drama, he noted, the dollar index has managed only a "100 to 101" bounce despite the market flipping from pricing two Fed cuts to a few hikes. His take: the dollar rally is close to running out of road.
  • The eurozone's inflation problem is now a gas problem, not an oil problem. On J.P. Morgan's inflation-markets podcast, At Any Rate (Jul 20), strategist Frida Infante detailed how June inflation fell to 2.8% (from 3.2%) on lower oil, but the fresh spike is being driven by natural gas (TTF at about €58 per megawatt-hour, the highest since April), and "the sensitivity of [front-end inflation] to gas has picked up." She flagged the regional split that matters for anyone trading European spreads: France fell all the way to 2%, while Spain sat stubbornly at 3.6%. And if fighting escalates enough to disrupt the Strait of Hormuz, "there is a risk that Brent could push back towards $100 per barrel."

What changed

Last Thursday the story was America: a shockingly soft inflation print that the dollar shrugged off, and a cornered Japanese yen. Both of those are still true. But this week the frame widened into something bigger, a synchronised turn across the developed world away from rate cuts and toward rate hikes. The ECB is now openly expected to lift rates again in September (and has already hiked once this year, a fact that seems to have slipped past a lot of people). Britain acquired a new prime minister and promptly got a bond-market warning shot, with gilts at their highest since 2008 and the fiscal arithmetic looking tighter than ever. And the common cause, a re-escalating energy shock through the Strait of Hormuz, is the same fuse under all of it. The setup into late summer: a firm-but-tiring dollar, a still-cornered yen, a carry trade that is the only thing working but is quietly leaning on a single Colombian peso position and cheap volatility, and a Japanese pension fund sitting on a switch that could flip the whole thing.