Macro Forecasts

BOJ reaching 1.00%+ worth ~15pp increase in probability of a 10%+ monthly USD/JPY move — aggressive normalization deepens hedging cost trap and risks triggering OTC institutional carry unwind cascade

BOJ reaching 1.00%+ worth ~27pp increase in probability of JGB 10Y exceeding 2.75% — amplified pass-through ratio (1.74x) and fiscal-monetary tension from Takaichi expansion drive yield acceleration

BOJ reaching 1.00%+ worth ~18pp increase in probability of core CPI staying above 2% through June — selection effect implies supportive wage-price data, but conjunction requirement for all 4 readings is strict

BOJ reaching 1.00%+ worth ~6pp increase in probability of UST 10Y exceeding 5% — marginal contribution through deepened hedging cost trap and repatriation pressure, but US-specific factors dominate

BOJ reaching 1.00%+ worth ~30pp increase in probability of Shunto >3.5% — strongest causal effect driven by powerful reverse causality (strong Shunto enables BOJ confidence to hike aggressively)

Demand-side pivot worth ~23pp to CPI exceeding 1.0% threshold, though still unlikely even with stimulus (28%) due to 40-month deflation inertia and deployment lags

Demand-side pivot worth ~24pp to retail sales exceeding 8% threshold, but still unlikely (30%) given property wealth destruction and structural barriers

Demand-side pivot worth ~21pp to CNY breaking below 6.70, adding China-specific catalyst to structural dollar weakness

Demand-side pivot worth ~17pp to copper sustaining above $10,500, adding consumer demand pillar to existing manufacturing demand

Demand-side pivot worth ~14pp to import prices exceeding 112, by weakening deflationary buffer that absorbs tariffs and dollar depreciation

Demand-side pivot worth ~8pp to HY spreads widening above 350bp, via removal of deflationary tailwind that keeps conditions loose

Fed rate cuts worth ~30pp to EUR/USD reaching 1.25 threshold — the single largest causal effect in the set, driven by rate differential compression and carry trade reversal

Fed rate cuts worth ~7pp to core CPI exceeding 3.0% — modest causal effect driven by dollar-weakening import price pass-through, partially offset by transmission lag timing

Fed rate cuts worth ~29pp to ECB resuming easing — driven by EUR appreciation forcing HICP below target, activating ECB institutional mandate for symmetric inflation targeting

Fed rate cuts worth ~8pp REDUCTION in IG spread widening probability — easing validates front-running and provides credit market backstop, making stress events less likely to breach 120bp

Fed rate cuts worth ~10pp to European equity outperformance — driven by portfolio rotation and carry trade reversal, partially offset by impaired eurozone credit and weak consumption

A Fed cut has negligible effect on core PCE convergence — tariff pass-through and shelter dynamics dominate regardless of rate decisions

A Fed cut is worth ~31 percentage points to the probability of dollar falling below 115, accelerating rate differential compression — the strongest causal effect in this analysis

A Fed cut is worth ~28 percentage points to the probability of mortgage rates falling below 5.75%, primarily through rate differential compression and spread dynamics

A Fed cut has negligible effect on HY spread stability — spreads are well below 350bp with strong cushion regardless of the rate decision

A surprise cut slightly reduces confidence in labor stability (-7pp), potentially because the signal effect (Fed sees weakness) outweighs the stimulus effect at short horizons

Tariff persistence has a large positive causal effect on import price inflation. If tariffs persist, the ensemble estimates a 50% probability of the non-petroleum import price index exceeding 112 by October 2026, driven by inventory buffer exhaustion triggering accelerated pass-through of accumulated 18-20pp cost pressure (tariff + FX). If tariffs expire, the probability drops to 15%, as the primary cost driver is removed and FX pass-through alone is insufficient to bridge the 3.3% gap. The 35pp causal delta reflects the centrality of blanket tariffs to import price dynamics.

Persistent blanket tariffs substantially increase the probability of core goods CPI exceeding 3% annualized (+27pp). The mechanism is inventory buffer exhaustion forcing firms to reprice off tariff-inclusive replacement costs, with the measurement window aligning with expected buffer depletion. Without blanket tariffs, the remaining channels (dollar weakness, sector-specific tariffs) are insufficient to produce broad-based goods inflation acceleration.

Persistent tariffs increase the probability of dollar decline to 112 by +15 percentage points (48% vs 33%). The causal mechanism runs through reserve currency confidence erosion: Congressional extension of blanket tariffs transforms a temporary emergency measure into a permanent trade regime shift, accelerating capital rotation from US assets and compounding BOJ normalization headwinds. Tariff removal, by contrast, reduces trade uncertainty and historically supports the dollar, partially offsetting structural headwinds. The ensemble identifies the monetary policy channel as a partial offset — tariff removal enables faster Fed cuts which weaken the dollar — but the net effect still favors dollar stability in the no-tariff scenario.

Tariff persistence modestly increases the probability of manufacturing adding 50K jobs (7% vs 3%), but both branches agree the threshold is virtually unachievable. The 4pp causal delta reflects a small theoretical channel: tariff permanence could signal policy durability that unlocks investment decisions, and tariff removal adds competitive headwinds. However, the dominant finding is that tariff status is secondary to the structural automation trend — manufacturing lost 81K jobs despite maximum tariff protection, and the 50K threshold requires a 24K/month swing that has no precedent under any trade policy regime.

Tariff persistence increases the probability of HY spreads exceeding 350bp by 12 percentage points. The primary channel is margin compression: firms absorbing 18-20pp of tariff costs will exhaust buffers by mid-2026, creating simultaneous margin and revenue pressure for overleveraged HY issuers. Tariff removal eliminates this channel entirely, making credit deterioration much less likely. However, even with persistent tariffs, 350bp remains unlikely (25%) given deeply accommodative financial conditions, declining defaults, and AI-driven risk appetite providing structural support.