Long-term interest rates rise in Japan, the US, and Europe: A sense that 'the lid is off' due to US rate hikes that bowed to the market

(MC Report 260925-a)

On September 23, while Japan was closed for the ‘Silver Week’ holiday, US long-term interest rates rose further. The US 2-year Treasury yield briefly hit 4.94%, and the 5-year Treasury yield surpassed 5%. The US 10-year Treasury yield briefly reached 5.13%, and by the following day, the 24th, it had risen to as high as 5.22%.
In Europe, long-term interest rates were also intermittently exploring room for further increases. Japan’s 10-year government bond yield rose to 3.075% on the 24th, after the holiday.
There was a view that if the Bank of Japan and the Federal Reserve showed a strong stance toward curbing inflation through interest rate hikes, the rise in long-term interest rates should be checked, but in reality, this has not happened, and the situation is moving in the opposite direction.
I will comment on this issue.

‘The Fed and ECB are also wary of the Middle East situation and the strength of AI demand,’ says Governor Ueda

At a press conference following the Monetary Policy Meeting on September 18, where an additional interest rate hike was decided, Bank of Japan Governor Kazuo Ueda responded to a question about the historic event of the Fed, ECB, and BOJ all implementing rate hikes in the same month as follows.

‘Perhaps the biggest point is that there is an aspect of reacting to relatively common factors. In other words, the inflationary pressure coming from the Middle East situation, and then the strength of spending around AI—this may affect the supply side of the economy in the long term, but so far it has been affecting the demand side. It is a slight inflationary pressure, and the fact that it is exerting strong force on the economy, while there are variations among different countries, is working relatively commonly, which I think is a factor in why several central banks moved at relatively similar times.’

Of the three factors the Bank of Japan cites as the basis for the risk that the underlying inflation rate will exceed the 2% target—(1) high crude oil prices against the backdrop of the Middle East situation and their ripple effects, (2) the strength of global AI (artificial intelligence)-related demand, and (3) the yen’s depreciation trend—US and European central banks share the same risk perception as the Bank of Japan regarding (1) and (2), excluding (3), which is a price increase factor unique to Japan.

During the ‘Silver Week’ period, crude oil futures fell as the supply risk for Saudi Arabian crude oil receded, which became a factor that temporarily lowered long-term interest rates in the US and Europe.
On the other hand, supported by the view that there is unlikely to be a brake on the increase in AI demand in the form of development regulations to guard against ‘human extinction risk,’ the tech-heavy US Nasdaq Composite Index hit record highs for consecutive days on September 21 and 22 (however, it fell back on the 23rd, disliking the sharp rise in US long-term interest rates).

Furthermore, the preliminary PMI figures for the Eurozone and the US released by S&P Global on September 23 were both strong numbers that exceeded expectations, becoming a factor that pushed up long-term interest rates.
If the economy is more secure than previously assumed, it will be easier for US and European central banks to continue raising interest rates to deal with inflation risks.
For the Eurozone’s September preliminary PMI, while manufacturing was 52.7 (flat from the previous month), services were 53.0 (+1.4 points from the previous month), and the composite was 53.1 (+1.1 points from the previous month). Contrary to expectations, it rose, and the composite reached its highest level since April 2023.
The US September preliminary PMI was 57.0 for manufacturing (+3.1 points from the previous month), 58.7 for services (+2.2 points from the previous month), and 58.4 for the composite (+2.4 points from the previous month), resulting in a comprehensively strong outcome that exceeded expectations.

With the September Fed rate hike pressured by the market, a situation where ‘the lid is off’

At the September FOMC, a rate hike was decided unanimously, but this was largely due to bowing to ‘market pressure.’ Just before the meeting, the probability of a rate hike priced in by interest rate futures had become extremely high, and if they had passed on the rate hike, it would have been a situation where major market confusion was expected.
In the era of Chair Powell, there was a technique of controlling market expectations through observation articles in the Wall Street Journal (WSJ), but Chair Warsh is seen as negative toward such methods. Just before this meeting, the WSJ published an article stating that while a rate hike at the September FOMC was certain, the problem was what would happen after that.