[Today's Interest Rates] Concerns over rate hikes weigh on the market

Currently, a very important change is occurring in how we view global interest rates.
In conclusion,
“Crude oil prices have fallen for the time being, and long-term interest rates have also dipped. However, central banks around the world are actually moving toward raising rates.”
That is the situation.
The U.S. 10-year yield broke through 5% last week.
However, it has recently fallen back to the 4.9% range.
At first glance, it may seem that the rise in interest rates has ended.
However, it is not that simple.
The Fed raised the policy rate by 0.25 percentage points last week.
The ECB is also raising rates.
And the Bank of Japan has also decided to raise rates to 1.25%.
In other words, the world has now entered a phase where we are not “waiting for rate cuts,” but rather considering “how much further interest rates need to be raised to curb inflation.”

Now, let’s look at global interest rates.
First, the overall picture.
The U.S. policy rate is 3.75% to 4%.
Japan has decided to raise its rate to 1.25%.
South Korea is at 3%.
The U.K. is at 3.75%.
The ECB’s deposit facility rate is 2.5%.
Canada is at 2.25%.
Australia is at 4.35%.
Russia is at 14%.

First, the United States.
The Fed raised the policy rate by 0.25 percentage points at the FOMC meeting on September 16.
It is currently 3.75% to 4%.
The important thing is why they raised rates.
The Fed does not see the economy as having collapsed. Economic activity is solid. Domestic demand is also firm.
On the other hand, inflation remains high.
This is the key point.
Until now, the market’s main assumption was that if inflation rates fell, rates could be gradually cut.
However, the situation is now the opposite.
Inflationary pressure has intensified again through factors such as energy prices, and they have actually shifted toward rate hikes.
And this is also reflected in short-term interest rates.
The 2-year Treasury note is in the 4.7% range.
This is a higher level than the current policy rate. In other words, the market does not believe this rate hike will be the last. In fact, the market has priced in a nearly 50/50 probability of an additional rate hike at the next meeting.
Meanwhile, the 10-year yield is around 4.93%. It has fallen from the over 5% level reached last week.
One of the biggest reasons for this is crude oil prices.
Due to expectations for diplomacy surrounding the Middle East, crude oil prices have fallen, and WTI briefly dropped below $100. Crude oil falls. Consequently, future inflation expectations drop slightly. As a result, long-term interest rates also tend to fall.
And one should not simply think that “the yield curve is normal, so the economy is strong.”
The 10-year yield includes not only the policy rate but also long-term inflation, real growth rates, term premiums, and the massive supply of government bonds.
In the current U.S. environment, these factors are pushing up long-term interest rates.

Next is Japan.
In Japan, on September 18, the Bank of Japan decided to raise the policy rate to 1.25%. This is the highest level in 31 years. The background to this is wages and prices.
The BOJ sees that companies are continuing to pass on wage increases to prices, and medium- to long-term inflation expectations are also rising. Furthermore, there is the high price of crude oil. Price increases for semiconductors and other goods due to AI demand. And the weak yen. These factors carry the risk of pushing up prices.
Therefore, the BOJ has further reduced the degree of monetary easing.
Here, let’s look at Japanese interest rates.
The 2-year is about 1.84%. The 10-year is about 2.98%. The 30-year is about 4.08%. This is quite characteristic.
The policy rate is in the 1% range, but the 10-year is about 3%. The 30-year is over 4%.
This means the market is not just looking at the BOJ’s rate hikes.
Long-term inflation. Japan’s fiscal situation. Government bond supply and demand. And future BOJ government bond purchases. These elements are being added to long-term interest rates.
In fact, the difference between the 10-year and 2-year is over 1 percentage point. This is a quite steep normal yield curve.
And another interesting point is the exchange rate.
Generally, when the BOJ raises rates,
Japanese interest rates rise. The Japan-U.S. interest rate gap narrows. The yen strengthens.
This is the common line of thinking.
However, this time, even though the BOJ raised rates, the yen has not strengthened.
One reason is that the U.S. is also raising rates.
Furthermore, the market is also watching the pace at which the BOJ can raise rates going forward.
Therefore, when looking at the current dollar-yen rate, it is necessary to look at “which of the Fed or the BOJ will raise rates more from here on out.”

Next, China, South Korea, and Australia.
China is in a quite different world.
The yield on China’s 10-year government bond is around 1.7%. This is significantly different from the U.S., U.K., and Japan.
In China, economic weakness is keeping interest rates down. The September LPR was also left unchanged. In other words, even amidst the global resurgence of inflation, China needs to balance this with supporting the economy.
And the yuan is currently rising to its highest level in several years.
Regarding China, it is necessary to look at the economy, exchange rates, and U.S.-China relations simultaneously, rather than just simple monetary easing.
South Korea is the opposite.
The Bank of Korea raised the policy rate to 3% in August. This is the second consecutive meeting with a rate hike.
The 2-year rate is about 4%. The 10-year is in the 4.4% range.
Market interest rates are significantly higher than the policy rate.
In other words, the market is still wary of inflation and the risk of additional tightening.
Australia is the same.
The policy rate is 4.35%. However, the 2-year government bond is about 5%. The 10-year is also over 5%.
The fact that short-term bonds are significantly higher than the policy rate means that the market is quite conscious of the risk of future additional rate hikes.
The IMF has also pointed out the possibility that additional rate hikes will be necessary to curb inflation.

Next is Europe.
The ECB raised the policy rate by 0.25 percentage points on September 10.
The deposit facility rate is 2.5%.
The reason is, as expected, inflation.
The Eurozone’s August inflation rate was 3.2%. It rose from 2.9% in July. In particular, the contribution of energy prices is large.
Therefore, the ECB is also moving toward raising rates again.
The German 10-year government bond is around 3.5%.
However, in Europe too, there is another problem with long-term interest rates.
Fiscal policy.
Including Germany, government bond issuance is increasing.
Furthermore, in countries like France, there is also wariness regarding fiscal risk.
In other words, for European long-term interest rates, it is necessary to look at inflation and government bond supply, not just the ECB’s policy rate.
The U.K. is also in a very interesting situation.
The BOE’s policy rate is 3.75%. It was left unchanged this time.
However, 3 out of 9 members supported a rate hike to 4%.
The U.K.’s August CPI was 3.1%.
And the Bank of England is wary of the possibility that the inflation rate will rise even further in the future.
On the other hand, to reduce the burden on the long-term government bond market, the BOE has stopped selling long-term government bonds.
In other words, they are using the policy rate to curb inflation.
Meanwhile, they are reducing pressure on the government bond market through quantitative tightening.
It is becoming a very delicate policy operation.
Furthermore, in the U.K. fiscal data released today, government borrowing in August exceeded expectations.
This is a point of caution for long-term interest rates.

Next is Canada.
The policy rate was left unchanged at 2.25%.
Canada has a significantly lower policy rate than the U.S. This interest rate gap is a weight on the Canadian dollar.
In fact, the Canadian dollar fell to its lowest level against the U.S. dollar in about 7 weeks. Russia’s policy rate is 14%.
Inflationary pressure remains strong, and the central bank stopped rate cuts at its September meeting. Since Russia’s level is significantly different from other countries, it is more important to look at the direction of inflation and the policy rate than simple international comparisons.

Here, let’s summarize the global yield curve.
The most important thing is why the curve is moving.
In the U.S., expectations for Fed rate hikes are pushing up short-term interest rates.
On the other hand, long-term interest rates include premiums for inflation, fiscal policy, and government bond supply.
Because the long-term side fell due to the recent drop in crude oil prices, it is trending slightly toward flattening.
However, Japan is different.
The 10-year is more than 1 percentage point higher than the 2-year. Furthermore, the 30-year is in the 4% range.
This is not just a signal of economic recovery.
Premiums for long-term inflation, fiscal policy, government bond supply and demand, etc., are extremely important.
South Korea, the U.K., and Australia are also basically normal yield curves, but in many countries, market interest rates are higher than policy rates.
In other words, the current bond market is not focusing on “central banks cutting rates from here,” but rather on “how much further tightening is needed to curb inflation.”

Finally, stocks and exchange rates.
First.
Crude oil prices fall. Inflation concerns recede. U.S. long-term interest rates fall. The discount rate for stocks falls.
This is a tailwind for high-PER growth stocks.
Second.
Expectations for additional Fed rate hikes remain. 2-year interest rates remain high. The attractiveness of dollar interest rates is maintained.
This tends to support the U.S. dollar.
This is one of the backgrounds for why the yen did not strengthen even when the BOJ raised rates.
Third.
The rise in Japanese long-term interest rates.
This can be a tailwind for banks in terms of improved margins.
On the other hand, the short-term prime rate rises, and the cost of corporate and mortgage financing also rises.
And if the Japan-U.S. interest rate gap narrows, it should theoretically be a force for a stronger yen.
However, this time, the Fed is also raising rates.
You should not judge the dollar-yen rate by looking only at Japanese interest rates.

To sum up the current global interest rate environment in one phrase: “The global rate-cutting phase has receded for the time being, and we are in a phase of pricing in the risk of re-hiking rates due to a resurgence of inflation.”
However, recently, that pressure has weakened slightly because crude oil prices have fallen.
There are three points to watch going forward.
First.
Trends in crude oil prices.
Second.
Whether the Fed will raise rates again at the next meeting.
Third.
Whether expectations for additional BOJ rate hikes will strengthen and the Japan-U.S. interest rate gap will truly begin to narrow.
In the current market, by looking not just at the policy rate, but at the 2-year yield, 10-year yield, and the yield curve, you can see what central banks and the bond market are thinking.

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