The big picture
The Bank of Korea's hike to 3% comes with growth forecasts revised up sharply, yet inflation is expected to stay above target through 2027. The Fed's tilt, not just its rate decisions, systematically compresses the common risk premium, an effect equivalent to 20% of intermeeting yield volatility. Nagel's warning against guidance beyond September echoes the Fed's caution about conditional statements, which account for 41% of future-oriented sentences.
On the watchlist
- 2026-09-10: ECB Governing Council decision on rates, with Nagel's stance on September hike to be tested.
- 2026-09-04: US August employment report, which will shape the Fed's tilt and term premia.
- 2026-09-15: Bank of Korea's next policy meeting, watching for a follow-up hike after the dissent.
- German 10-year yield: watch for a break above the highest since 2011, on euro-area inflation data.
Top stories
Why it matters The hike to 3% with a dissent and higher growth forecasts forces a repricing of Korean assets, as inflation at 2.8% stays above the forecast for 2026.
The Bank of Korea raised its Base Rate by a quarter of a percentage point to 3%, with one Board member voting against, as growth forecasts were revised up sharply and inflation is expected to stay above target.
- CPI inflation, y/y 2.8%
- Core inflation (ex food and energy), y/y 2.6%
- CPI inflation forecast 2027 2.3%
- Core inflation forecast 2026 2.5%
Why it matters The Fed's tilt compresses term premia by 20% of intermeeting volatility, which means duration risk is systematically underpriced and vulnerable to a shift in Fed communication.
The Federal Reserve's policy stance has long included a forward-looking, conditional component—the 'tilt'—used for risk management, which complements direct policy actions and significantly affects financial markets by stabilizing risk premia. Evidence from FOMC transcripts (1976–2019) and asset-price data shows that asymmetric tilts, motivated by risk perceptions, transmit to term premia and are a persistent feature of Fed policymaking, with implications for the current debate on forward guidance.
Future-oriented statements account for over half (51%) of all policy sentences, and within that set, 41% involve explicit conditionalities. This conditionality is the essence of the tilt: the Fed signals a likely direction of policy but conditions it on incoming data. The paper documents that such tilts are not merely rhetorical—they move markets. On FOMC days, the ten-year yield falls by −1bp on average, while stocks rise by 12bp, reflecting a reduction in the common risk premium. The magnitude of this common-premium reduction is on the order of 20% of the intermeeting volatility of the ten-year yield.
The authors use text analysis of FOMC transcripts (spanning over three hundred meetings) and a hawkish-dovish score to measure stance, then decompose asset-price moves to isolate the Fed's effect on risk premia. They find that dissents often carry preemption arguments: of the dissents in voice, 60% contain such an argument, and hawkish dissents vastly outnumber dovish ones (130 vs. 33). Historical directives also show the tilt's persistence: between 1987 and 1998, the vast majority of directives left policy unchanged, of which 27 carried a bias toward tightening and 17 a bias toward easing.
Counterpoints include Brainard's parameter uncertainty, which argues for dampened policy, and concerns that unexercised tilts devalue the signal. The 2020 framework's one-sided focus created uncertainty about the reaction function, itself a source of risk. For investors, the mechanism is direct: a tightening tilt reduces the term premium, lowering long-term yields, while the post-2020 framework led to the largest term premium increase since 1994, raising the cost of long-term government borrowing.
Why it matters Nagel's refusal to guide beyond September leaves the ECB's path data-dependent, and with euro-area inflation at 3.3%, Bund yields face further upside pressure.
He cautioned against giving guidance beyond that meeting due to volatile oil and gas prices and financial market uncertainty. Nagel defended the German fiscal package as a temporary measure and expressed support for purpose-bound eurobonds for defense.
Why it matters The German 10-year yield at its highest since 2011 raises funding costs across the euro area, forcing a reassessment of duration exposure in core government bonds.
During the reporting week in late August 2026, the euro weakened against the dollar, US Treasury yields rose on hawkish Fed comments, and German 10-year yields reached their highest level since 2011, driven by inflation and fiscal concerns. The German 10-year yield rose to 3.28%, while the US 2-year yield climbed to 4.34% and the US 10-year yield edged down to 4.72%. The Hungarian central bank cut its policy rate by a quarter of a percentage point to 5.5%, while the Turkish central bank kept its rate at 37% and resumed one-week repo operations.
US PCE inflation held at 3.7% year-on-year in July, with core PCE at 3.3%, supporting higher US yields. In the euro area, German IFO business climate improved to 88.8 in August, and the euro area ESI rose to 98.4, but inflation concerns and fiscal worries pushed German yields higher.
The rise in German yields signals higher euro area borrowing costs, affecting fiscal sustainability and ECB policy expectations. The Fed's hawkish stance supports higher US Treasury yields, influencing global bond markets and capital flows to emerging economies like Serbia. Geopolitical risks, including Middle East conflicts and US pressure on Iran, could disrupt oil supplies and push prices higher, complicating the inflation outlook.
- Germany 2-year yield 2.9%
- US PCE inflation, m/m 0.2% (2026-06 −0.1%)
- US initial jobless claims 203,000 (2026-08-15 207,000)
An ECB blog post finds that banks issuing synthetic securitisations lend marginally more but also pay higher dividends. Outstanding synthetic securitisations backed by SME loans reached roughly a quarter trillion euros at end-2025, versus about a third less for traditional ones. A one-percentage-point increase in synthetic issuance raises corporate loan growth by about two basis points, while dividends rise by seven basis points. The post, hidden in the ECB's blog, would be settled by the next Financial Stability Review's data on issuance and lending.
Also today
Read the piece
The European Banking Authority has launched a consultation on draft technical standards specifying requirements for governance and management of operational risk under the Capital Requirements Regulation, integrating ICT risk management requirements under DORA. The consultation, announced by the Financial Supervisory Authority of Norway, closes 31 December 2026; the final RTS will determine capital charges for operational risk.
Read the piece
The dollar's share of global official reserves fell from nearly two-thirds in 2015 to just over half in 2025, but this decline is driven by a few large reserve holders like China and Russia, not a broad-based shift. From 2019 to 2023, the decline is almost entirely due to preferences of four countries with missing data. The analysis, published on Liberty Street Economics, would be settled by the IMF's Currency Composition of Official Foreign Exchange Reserves (COFER) data showing whether other central banks are diversifying.
Deep dives
Read the analysis
Kenyan banks reported improved asset quality in the second quarter of 2026, with the gross NPL ratio dropping to 14.8% from roughly a sixth in March, while profitability rose as return on equity reached 24.1%. However, capital adequacy slipped to 20% and the liquidity ratio eased to 61.2%, still well above the statutory minimum of one fifth. The mixed results reflect a sector cautiously emerging from credit stress, with banks planning to deploy their improved liquidity toward private sector lending and government securities.
According to the central bank's quarterly survey of senior credit officers, three quarters of respondents said their liquidity position improved, and two thirds reported increased interbank lending, while nearly three quarters saw interbank borrowing decline. Banks intend to allocate roughly a third of the additional liquidity to private sector lending, about a fifth to interbank lending, a fifth to Treasury Bills, and a sixth to Treasury Bonds. This allocation signals sustained demand for government paper, supporting fiscal financing, while the private sector lending push could accelerate credit growth and improve monetary policy transmission.
The improvement in NPLs is attributed to recovery efforts and reduced loan relief, but credit risk persists as banks consider restructuring loans outside the central bank's waiver, which may increase provisions. The ratio of gross loans to total assets rose to 52.3%, indicating a renewed appetite for lending. Looking ahead, nearly half of respondents expect NPLs to fall further in the third quarter, suggesting continued improvement in asset quality, though capital adequacy remains a watchpoint.
- Respondents reporting improved liquidity 75%
- Respondents reporting increased interbank lending 67%
- Respondents reporting decreased interbank borrowing 73%
- Respondents expecting NPLs to fall next quarter 45%
In brief
Rates & Bonds 23 items
Across twenty-three releases, central banks and statistical offices reported on rates, growth, and market operations, with several showing divergent trends: the Bundesbank announced a reopening auction for two Green Federal bonds, while the Bank of Japan's board member spoke on policy without specifics. Notable figures include Australia's GDP growth at 0.4%, Italy's producer price inflation at 7.8%, and Ghana's CPI at 5%, each pointing to varied economic conditions. The CBR's maximum deposit rate reached 12.89%, and the RBI's 91-day T-bill cut-off yield stood at 5.26%. The Bank of Jamaica's total offer amount was JMD 22bn, while the Bundesbank's total bid amount reached $101m.
Show all 23 items
FX & Emerging Markets 6 items
In the FX and emerging markets group, six releases covered reserve flows and external balances. India's FCNR(B) deposits inflows were $127.23bn, with swap facility mobilisation at $52.8bn. Denmark's foreign-exchange reserve stood at DKK 693.6bn, and the BCEAO's overall balance of payments for 2024 was XOF 43.9bn. Uzbekistan's market services volume reached UZS 802.5trn. The PBoC governor's participation in the G20 meeting was noted without specific figures.
Regulation & Structure 13 items
Thirteen regulatory and structural items show a common theme of tightening oversight and adapting frameworks. The CBR reported a transfer time of 25 minutes and announced supervisory measures 550. The Bahamas' complaint acknowledgement deadline was 5 business days. Several institutions issued notices on sanctions, reporting requirements, and cooperative bank governance, reflecting a global push for stronger compliance and fraud prevention.
Show all 13 items
Other market topics 2 items
Two items from the SNB relate to a bond: the coupon rate was 2.93% and the amount outstanding was €3bn, providing key details for investors tracking Swiss debt.
No direct market impact 23 items
Across twenty-three items with no direct market impact, the releases span diverse topics from economic data to institutional reports. Notable figures include the EIB loan tranche at €500m, Eurostat's share of household consumption expenditure at 46%, Estonia's services exports growth at 5%, Fiji's tourism earnings at FJD 708.1m, and Maldives' real GDP growth at 6.3%. Other items include the ILO's work days per week 6.7 days per week, Malta's EU share of Australia's trade 13.9%, Cuba's maximum workers for private enterprises 100 workers, Brunei's digital financial literacy score 43%, Bosnia's SPPI for road freight 140.261 and industrial turnover index 138.7369. Several releases also covered meetings, reports, and enforcement actions without specific figures.