September Rate Hike Probability Still Subject to Key Data
With the Fed pausing forward guidance, market rate hike expectations continue to fluctuate. At the beginning of the week, due to the hawkish tone set by Fed Chair Powell and a sharp rise in oil prices, the probability of a rate hike increased from around 30% in mid-August to about 60-70%. On September 3, Governor Waller stated that if inflation continues to decline, he would support keeping rates at 3.50%-3.75%, causing the probability to drop back to around 50%. On September 4, the August non-farm payrolls far exceeded expectations, pushing the probability back up to 58%. Institutional views are also divided: JPMorgan Wealth Management changed its stance to expect a 25-basis-point hike, HSBC said the probability is nearly 50-50, Goldman Sachs maintained its view based on core inflation rising only about 0.2% month-on-month, and Morgan Stanley sees no change for the year. Last week's two sets of labor data pointed in opposite directions—ADP added 38,000 jobs, the slowest this year, and the ISM services employment sub-index of 47.8 contracted for two consecutive months, but non-farm payrolls and a 4.1% unemployment rate showed strong resilience. The Investment Department believes that the outcome of the September meeting remains uncertain, and compared to last week's economic data, changes in the bond market better reflect shifts in market sentiment: the two-year yield rose only 2 basis points to 4.37% for the week, indicating that rate hike expectations have not changed significantly, and the futures market's reaction to a rate hike is relatively stable.
Long-Term Yields Hit New Highs, Constraining Equity Valuations
The 30-year yield closed at 5.24%, flat for the week, but touched 5.28% intraday on September 2, the highest since 2007. In the same week, Japan's 10-year yield hit 3.00% for the first time, while the UK's 30-year and France's 10-year yields reached their highest levels since 1998 and 2008, respectively. The Investment Department's analysis suggests that the current rise in long-term yields is not driven by underlying economic concerns but rather by worries about fiscal expansion and inflation control: short-term rates are currently unchanged, corporate earnings are still being revised upwards, and the P/E ratios of the S&P 500 and Nasdaq 100 have actually decreased since the beginning of the year. Long-term yields are currently capping valuations, not triggering a sell-off. The Investment Department advises that if there are concerns about the impact on long-term yields, repositioning some assets defensively could be a directional option. Historically, at the current yield levels, the upside for long-term yields is relatively limited, improving the risk-reward profile of bonds.
Oil Prices Surge, but Market Sensitivity to Rates and Equities Declines
Oil prices rose 7.19% over the week, with Brent reaching around $96.5, while the S&P 500 was flat and the two-year Treasury yield only increased by 2 basis points. The Investment Department believes that the market's sensitivity to oil price-driven inflation has become more muted, or already priced in. However, the ISM services price paid sub-index of 72.6 is a four-year high, and whether this will translate into consumer prices is a key observation point for the week. Gold fell 0.60% to around $4,400. The Investment Department's view is that after the initial decline, gold's investment value has improved, but a short-term recovery depends on inflation data and the policy meeting, with the long-term bullish view remaining unchanged.
Strong AI Hardware Fundamentals, but Market Valuation and Sentiment Suppress Stock Recovery
Broadcom's third-quarter AI semiconductor revenue was $16.7 billion, up 221% year-on-year, exceeding the market expectation of $15.2 billion. Its AI revenue roadmap targets $58 billion for the 2026 fiscal year, $115 billion for 2027, and $230 billion for 2028. Maybank Kim Eng raised the capital expenditure guidance for the four major cloud service providers to about $733 billion for the year, with high-bandwidth memory export prices rising about 47% quarter-on-quarter. However, Broadcom's stock fell 2.74% the day after the earnings release and 2.95% for the week, down 16.33% over the past month. The Investment Department believes that the reason for the stock's inability to recover quickly is that the valuation threshold has been raised: consensus estimates were revised up by about 12.5% for Broadcom's 2028 fiscal year EPS within a week, almost matching the company's own framework, with the Q4 guidance of approximately $34.8 billion aligning with the consensus estimate of $34.813 billion. Once consensus matches the company's framework, beating estimates is no longer a catalyst. Notably, -2.74% is Broadcom's smallest decline in the 11 post-earnings days, indicating that the market does not deny the fundamentals but is suppressing optimism about future growth.
Morgan Stanley Sees Supply Chain-Driven Growth Over the Next 12 Months
For memory manufacturers, this means a prolonged price increase cycle; for AI chips, it means that revenue ceilings are determined by capacity rather than orders. Broadcom and Marvell, which focus on customized chips, currently have higher valuations than general-purpose chip companies like Nvidia, implying higher market expectations for their growth expansion. In the memory sector, the Investment Department maintains its previous stance, with evidence of price increases continuing to accumulate, but stock prices are constrained by compressed valuation multiples. Positioning data shows that foreign investors continued to sell Korean spot stocks last week and used futures to hedge macro risks. Goldman Sachs maintains a KOSPI target of 12,000, contrary to the overall downward revisions by other banks. Software stocks gave back gains last week, with the software ETF falling 4.50%, reversing the previous week's direction. Currently, there is rapid rotation between sectors, and the Investment Department reminds that one week's direction is insufficient to form a consensus view. From a funding perspective, positioning data shows that hedge fund net leverage has remained flat at 77% for three consecutive weeks, not at a level requiring forced deleveraging.
Yen Appreciates About 2.4% in a Week, Development Consistent with Long-Term Fundamentals
The USD/JPY exchange rate fell from 159.79 to 155.97, with the yen appreciating more than 2% on September 3, touching 155.28 intraday, the strongest in a month. Board member Koda suggested on September 2 that rate hikes should be flexible and not strictly adhere to a biannual schedule. Governor Ueda hinted twice on September 3 and 4 that a rate hike would be discussed this month. The Ministry of Finance described the exchange rate volatility with high alert, and the market's pricing for a rate hike on September 18 rose to about 77%. The Investment Department's analysis suggests that Japan's hawkish turn is driven by proactive management of inflation expectations. In addition to policy statements, last week's new inflation expectations had a clear source: the food consumption tax will be reduced from 8% to 1% over two years starting April 2027, a plan decided by the cabinet in early August. Japan's fiscal expansion and inflation expectations are pushing Japanese interest rates into a similar phase of expectation management as the US, albeit at an earlier stage of development. The current policy rate of 1.00% is the highest since 1995, raised on June 16. Even so, with the Bank of Japan's forecast of 1.7% core inflation for the 2026 fiscal year, the real policy rate is still about -0.7%. The 10-year yield broke 2% in December 2025 and first touched 3.00% on September 1, taking about three quarters, but the yen's interest rates, suppressed by long-term USD/JPY carry trades, only began to rebound in July and rose again in early September. Rates climbed for several quarters, but the yen did not appreciate in tandem, reflecting a lag in market pricing influenced by macro, geopolitical, and arbitrage factors.
Yen's Upward Momentum Remains Uncertain
JPMorgan estimates that most yen carry trades have been unwound, but the remaining short positions still have a nominal value exceeding $100 billion. If USD/JPY breaks below 155, there is a risk of accelerated short covering. CFTC data shows that leveraged funds' net short yen positions were about 138,000 contracts at the end of June, the highest since 2007. Large speculators' net short yen positions fell to about 63,000 contracts in the week ending August 25. Both categories indicate a significant reduction in net shorts, but unwinding is not complete. There are signs of a long-term upward trend in capital flows: Japanese investors sold a net $3.42 trillion in foreign bonds in February, the largest monthly amount since 2024, and life insurers have shifted back to domestic markets as hedged ultra-long Japanese bond yields now exceed those of 30-year US Treasuries. However, foreign investors sold a net $1.28 trillion in 2-year and 5-year Japanese government bonds in July, the largest since July 2006. The Investment Department maintains a neutral-to-bullish long-term view on the yen, but the short-term direction is uncertain. The yen is currently in a highly contested area, and subsequent volatility may increase. Even if there is a short-term pullback, the central range of the yen against the dollar may have already shifted higher: the US rate hike expectations are driven by inflation, and real rates may not rise or even fall, while Japanese rates are on an upward trajectory. Given the previous quarters of rising rates without yen appreciation, whether a turning point is near is uncertain, and the Investment Department lists this as a key observation point. JPMorgan judges that the Japanese stock market can withstand 10-year yields up to 4%, Natixis has increased its allocation to Japanese equities, and the TOPIX P/E ratio of 16 is at the lower end of the range. The September 18 meeting is the next policy milestone.
Bullish View on Hong Kong Stocks Unchanged, Sectoral Differences Pronounced
Morgan Stanley lowered its China index targets last week, reducing the CSI 300 target for June 2027 from 5,400 to 4,800 and the Hang Seng Index from 28,400 to 26,550, citing weaker macro data and tightening liquidity. However, the Investment Department maintains a long-term bullish view on Hong Kong stocks and believes that the value proposition of tech stocks is particularly compelling. The Hang Seng Index rose 0.26% last week, outperforming the CSI 300, which fell 1.33%. Tencent and Alibaba fell 7.52% and 11.07% respectively over the past month, while Alibaba and Baidu's AI cloud revenues grew 45% and 50% year-on-year, and Tencent Cloud also showed healthy growth. Despite the stock price correction, which is consistent with the usual speculative capital logic in Hong Kong, the growth in cloud business has remained robust. The Investment Department's analysis suggests that while the index is constrained by macro and liquidity factors, this does not conflict with structural opportunities: liquidity constraints affect valuation multiples, but the growth in AI cloud and IT hardware revenues impacts earnings, which are determined by different variables. Maybank Kim Eng is overweight on IT hardware and names Foxconn and NAURA as picks, aligning with this view.
Policy Event Reminders
The Ministry of Finance will issue RMB 300 billion in special sovereign bonds to support eight central financial enterprises in replenishing core Tier 1 capital, totaling about RMB 360 billion. ICBC and ABC will raise up to RMB 100 billion and RMB 160 billion, respectively, with the issuance targeted at the Ministry of Finance and China National Tobacco Corporation and its subsidiaries. On the US side, Commerce Secretary Raimondo indicated that the US is preparing to impose new tariffs on imported semiconductors, with the rate yet to be determined. The Investment Department remains bullish and views the reported Sino-US summit on September 24 as a catalyst for the continuation of structural opportunities.
※ Extracted from the Investment Research Weekly (7 September 2026) prepared by our Investment Department. For general reference only; this does not constitute investment advice or an offer. Please refer to the Disclaimers.
