Compared to last week, this one should be much slower. There are no central bank meetings and no major economic releases. The only notable event will be Micron’s earnings. Treasury will auction 2-year, 5-year, and 7-year notes on Tuesday, Wednesday, and Thursday, but settlements for these auctions won’t occur until next week.

For the most part, this week will be about digesting last week’s leftovers from the Fed, BoE, BoJ, and options expirations. The BoJ left rates unchanged on Friday, as expected. What wasn’t expected was that two members dissented, favoring a rate hike. As a result, the odds of an October hike have climbed to nearly 50%, up from virtually zero before the meeting.

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As a result, Japan’s 2-year yield jumped 3 bps to its highest level in decades. The breakout from a bullish ascending triangle pattern suggests it could move significantly higher, with a target above 1.1% looking reasonable.

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Meanwhile, the 5-year JGB also broke out of its ascending triangle, and a simple extension points to a move toward 1.4% or higher.

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So far, the impact on USDJPY has been limited, which is puzzling given the collapse in Treasury–JGB spreads. One explanation may be that the FX market doesn’t expect U.S. rates to fall and instead anticipates the spreads correcting through higher U.S. yields.

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In the meantime, 63-day realized volatility for the S&P 500 fell to 8.86 on Friday, below the levels seen in July 2024. The last time it was lower was in January 2020, October 2018, December 2017, and July 2014. Each of those periods was followed by a surge in market volatility, and given how overbought the market is now, it wouldn’t be surprising to see history repeat.

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Finally, the idea that rate cuts automatically fuel the market higher isn’t entirely correct when viewed over time. Raising rates in 2023 didn’t stop stocks from rallying, even though theory suggested they should fall. Historically, the outcome has been more of a 50/50, data-dependent story. The chart below shows plenty of instances in recent history where Fed rate cuts were followed by stocks heading straight down. In the 1970s, rate cuts often lifted equities, but that hasn’t consistently been the case from the 1990s onward.

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