The two-year Japanese government bond yield jumped to 1.475% on Wednesday, its highest level in 31 years, as traders bet that the Bank of Japan will accelerate the pace of rate hikes. Of course, what constitutes a faster pace of rate hikes in Japan is different from elsewhere in the developed world — only one quarter-point hike is fully priced over the next six months.
The BOJ is certainly in a tough spot, with oil prices shooting higher again, the yen at a 40-year low against the dollar and an all-time low on a "REER" basis. More aggressive tightening appears to be warranted, but that would not be welcomed by Prime Minister Sanae Takaichi's government. While the BOJ sits on its hands, the yen remains under heavy pressure.
As energy prices rise, so do bond yields, and so too does the pressure on households. The latest figures show the average 30-year mortgage rate is at its highest in almost a year and average gas prices are back above $4 a gallon. Both are set to rise further — the 30-year Treasury yield is having its longest stretch above 5.00% since 2003, and crude is up 30% in just three weeks.
On the plus side for Americans, equity markets are still holding up well, which is helping to boost the wealth effect and keep financial conditions loose. But the relief from softer-than-expected inflation readings for June will likely be short-lived, and spending power is being squeezed. Main Street may feel the pinch more than Wall Street.
What could move markets tomorrow?
- South Korea GDP (Q2, advance)
- European Central Bank interest rate decision
- U.S. weekly jobless claims
- U.S. Treasury sells $21 billion of 10-year TIPS at auction
- U.S. earnings, including Intel, Blackstone, T-Mobile
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