For investors in global financial markets, as the Bank of Japan and the Federal Reserve announce their March interest rate resolutions in the coming days, this week will undoubtedly be a true central bank super week.
As this super week approaches, the biggest concern in the current market is undoubtedly: what will happen to the cross asset market if the central banks of the United States and Japan simultaneously release their hawks?
This is not a small probability event - Tuesday's decision by the Bank of Japan has been seen by many industry insiders as a "nuclear level" event that is more important than the Federal Reserve's interest rate meeting, because according to the revelations from Japanese media and bets in the interest rate swap market, this once the most loyal player of the "global negative interest rate experiment" is likely to announce the end of negative interest rates this week.
Once the Bank of Japan truly makes this decision, it will be the first time in 17 years since February 2007 that Japan has raised interest rates, and it will also mark an important turning point in Japan's financial policy towards normalization.
On the other side of the ocean in the United States, with continued hot economic data and sticky inflation indicators, it is almost impossible for the Federal Reserve to choose to cut interest rates this week. Meanwhile, the trend in financial markets indicates that traders have expressed concerns about the hawkish bias of the Federal Reserve in maintaining its monetary policy stance. Last week, the 10-year US Treasury yield, known as the anchor of global asset pricing, jumped by 24 basis points, marking the largest increase since October last year. According to the bets in the interest rate futures market, the probability of the Federal Reserve cutting interest rates in June has shrunk to 50-50- people can no longer rule out the possibility of the first rate cut being postponed to the second half of the year
All of this may mean that the degree of global monetary policy easing this year may be more inclined towards tightening than expected at the beginning of the year: the expected shift in interest rate hikes by the Bank of Japan is expected to come earlier, while the easing actions of other G10 central banks such as the Federal Reserve are expected to be slower in the future - the pattern of "higher and longer" interest rates is expected to continue for a longer time. And this scene may pose a new and severe test for both the stock, bond, and commodity markets.
Bank of Japan: End negative interest rates this week?
After the preliminary results of last week's "spring battle" in Japan were released, industry insiders have generally believed that ending negative interest rates by the Bank of Japan is already a matter of "everything is ready but the wind is blowing". As the Bank of Japan approaches a new window on Tuesday to announce its latest interest rate decision, all market participants are focusing on whether the bank will announce this milestone decision.
Last Friday, Rengo, the largest trade union federation in Japan, just announced the preliminary results of the "Spring Battle". Member unions won an average salary increase of 5.28% this year, the largest since 1991, exceeding last year's increase of 3.8%. This largest salary increase in over 30 years has strengthened industry expectations for the Bank of Japan to "end negative interest rates" this week.
In the past two weeks, local Japanese media have clearly become more focused on the possibility of the Bank of Japan ending negative interest rates this week.
According to Nikkei News last Friday, the most likely plan for the Bank of Japan is to raise policy interest rates by more than 0.1 percentage points to guide short-term interest rates to the 0% -0.1% range. In addition, the Bank of Japan may completely cancel the Yield Curve Control Policy (YCC).
The Nikkei News quoted a source from the Bank of Japan as saying, "This year's wage increase has reached a level where even cautious reflators of monetary policy will accept policy changes.".
Bank of Japan officials, including Governor Watanabe Uchida, have recently emphasized multiple times that the timing of ending negative interest rates will depend on the outcome of this year's annual wage negotiations between workers and employers. A government source familiar with the Bank of Japan's review process stated last week, "Given that the market has already digested March's actions, there is no reason for the Bank of Japan to postpone the decision until April."
Another senior government official who regularly interacts with current officials of the Bank of Japan pointed out that "the Bank of Japan may take action sooner rather than later."
Without a doubt, if the Bank of Japan really raises interest rates, it may completely change the current pattern of Japan's capital market. Previously, driven by factors such as the weakening of the Japanese yen and its positive impact on domestic exporters, the Nikkei 225 index had just surpassed a historic high of 40000 points this year.
Guojin Securities stated in its research report last weekend that the exit of the super loose policy seems to pose a certain negative impact on Japanese stocks from both the denominator and numerator ends. Firstly, the exit of negative interest rates may lead to an increase in Japanese bond rates, which is bearish on Japanese stocks from the denominator end. Secondly, 42% of the revenue of Japanese stocks is from overseas, and the adjustment of the "super loose policy" may drive the appreciation of the yen, thereby impacting the profitability of Japanese stocks. Thirdly, net exports in the early stage are an important support for the Japanese economy, and the exit of the "super loose policy" may also affect the quality of Japan's economic recovery.
Naka Matsuzawa, a strategist at Nomura Securities, believes that the Bank of Japan will comprehensively change its policy framework this time. Although the direct reaction from the market may be mild - as the Bank of Japan has had good communication with the market regarding the next steps towards normalization. But even so, the market has not yet digested how quickly the Bank of Japan will reduce the purchase of Japanese treasury bond, which may lead to higher yen, higher yield of Japanese treasury bond and lower stock prices. Investors' preference for stocks will also shift from export-oriented stocks to domestic demand driven stocks.
Federal Reserve: Is Interest Rate Reduction Fearing to be Delayed Again and Again?
Shortly after the Bank of Japan announced its most important interest rate decision in recent years on Tuesday, the Federal Reserve will also release its latest March interest rate decision at 2am Beijing time on Thursday. Just as people are currently guarding against the Bank of Japan's hawking, many market participants also have similar anxieties about this week's Federal Reserve decision.
The recent trend of the US bond market has shown that bond investors who once believed that the Federal Reserve would begin to cut interest rates this week at the beginning of the year are painfully surrendering to the reality that interest rates are "higher and longer", and traders are confused about the way ahead - in recent days, the US bond yield has been soaring, approaching a new high in the year, because data continue to show that the US inflation stickiness continues to exist, which has led to traders postponing the timetable of the Federal Reserve's interest rate cut.
At present, the interest rate swap market has an expectation of less than 75 basis points (less than three rate cuts) for the Federal Reserve to cut interest rates within the year. This is not only lower than the Federal Reserve's December chart estimate, but also far from the forecast of six interest rate cuts at the end of last year.
Meanwhile, it has become difficult to determine whether the first interest rate cut can be achieved in the first half of the year - the probability of a rate cut in June has dropped to about 50-50.
The changes in this series of interest rate bets have highlighted increasing concerns that at the two-day meeting starting this Tuesday, Federal Reserve decision-makers led by Federal Reserve Chairman Powell may signal a weaker easing cycle.
"The Federal Reserve wants to loosen, but the data does not allow them to do so. They want to maintain the option of summer easing. But if the labor market is tight and inflation rates remain high, they will start to change," said Earl Davis, head of fixed income and money markets at Bank of Montreal Global Asset Management
The yield of the US 10-year treasury bond bond jumped 24 basis points last week to 4.31%, the largest weekly increase since October, and has been infinitely close to the high point of 4.35% so far this year. Davis believes that the 10-year bond yield may eventually rise to 4.5%, which will provide him with an entry point to buy bonds. Last year, the benchmark yield exceeded 5% for the first time since 2007.
Nomura currently predicts that the Federal Reserve will only cut interest rates twice this year in July and December, rather than its previously estimated three rate cuts - taking action in June, September, and December. Nomura economists, including Aichi Amemiya, wrote in a report, "As the Federal Reserve is not in a hurry to relax policies, we expect the Fed to wait for inflation to slow down before starting the rate cut cycle."
At present, industry insiders generally believe that one of the most likely focal points in this week's interest rate resolution to reflect the Fed's hawk dove tendency will be the Fed's interest rate chart. In this regard, it is important to remind investors that as long as two Federal Reserve officials adjust the original three rate cuts to two, the median estimate in the dot matrix will change to only two rate cuts in 2024.
Tim Duy, Chief US Economist at SGH Macro Advisors LLC, believes that even if the median interest rate forecast for 2024 remains unchanged, the positions of the "dots" on the grid for 2025 and 2026, as well as the long-term neutral interest rate, may also be adjusted. This situation will prompt traders to price the reduction in interest rates.