Japan, eurozone GDP upgrades fuel global rate hike bets

Upward revisions to second-quarter economic growth in both Japan and the eurozone have reinforced expectations that major central banks will press ahead with interest rate increases, as stronger-than-expected output adds to a global picture of resilient demand and persistent inflation.

Japan's Growth Revised Up

Japan's Cabinet Office on Tuesday revised its estimate of second-quarter real GDP growth to an annualized 1.4%, up from a preliminary reading of 1.1%, according to Reuters. The upgrade was driven primarily by a smaller decline in business investment than initially reported. On a quarter-on-quarter basis, GDP grew 0.4%, above the initial estimate of 0.3%. The revised figure still fell short of the 1.6% median economist forecast.reuters+3

Nominal GDP rose at an annualized 5.5%, with the GDP deflator — a broad measure of economy-wide prices — climbing at a 3.9% annualized rate, underscoring that much of the increase in output reflected higher prices rather than real activity.novascotia

The data strengthened the case for the Bank of Japan to raise its policy rate by 25 basis points to 1.25% at its September 17–18 meeting. An economic adviser to Prime Minister Sanae Takaichi said on Monday that the BOJ is likely to hike this month and continue raising rates roughly once per quarter until January, according to Reuters. Markets had already been pricing in about an 80% probability of a September hike. Japan's Nikkei 225 fell nearly 2% on Tuesday as a surging yen — at its strongest since February — weighed on exporter stocks.reuters+2

Eurozone Beats Expectations

Separately, Eurostat Euronext N.V. revised eurozone second-quarter GDP growth to 0.6% quarter-on-quarter, up from a prior estimate of 0.4% and well above the consensus forecast. On a year-over-year basis, growth doubled to 1.2% from 0.6% in the first quarter. Household spending rose 1.2% year-on-year, contributing 0.6 percentage points to growth, while gross fixed capital formation added another 0.3 points.logos-pres+2

The stronger data complicates the European Central Bank's position. Eurozone inflation accelerated to 3.3% by late August, which may force the ECB to keep rates elevated longer even as the economy outperforms its own forecasts.logos-pres

Global Rate Pressure Builds

The twin GDP upgrades arrive alongside a robust U.S. labor market and oil prices grinding toward $100 a barrel amid Middle East tensions, all of which support the argument for further rate increases — possibly even from the Federal Reserve. Copper hit an all-time high on Monday, reflecting broad confidence in global growth, though rising borrowing costs could eventually test how long equity markets can sustain their gains.reuters