Last week was a very busy week indeed. Front and center we had the Fed, the ECB, and the BOJ’s monetary policy meetings. The Fed’s FOMC meeting was pretty much as expected. The Fed raised the policy rate to 5.50%, gave nod to some positive news on the inflation front, signaled they are near the end of their tightening run but stated that the labor market is still very strong, and the last 3 FOMC meetings are essentially live ones. The risk markets are pricing in a 2024 soft-landing for the economy and the Fed Funds futures and OIS markets are pricing in 3 rate cuts in 2024, starting in the second quarter. Essentially, the markets are pricing in the Fed’s ability to engineer the softest of landings in recent economic history. The real central bank fireworks came Thursday night when the last easy-money holdout, Japan, announced it was finally starting to unwind its massive quantitative easing program, Yield Curve Control (YCC). Since 2016 the BOJ put a 25-basis point cap on Japanese Government Bond 10-year debt. Late last year they increased the cap to 50 basis point (sparking a selloff that shot 10-year yields immediately up to 50 basis points from 25). On the news, JGB yields jumped, taking other longer dated sovereign bond yields up with them as the US 10-year Treasury note breached 4%. The BOJ owns roughly 45% of the JGB market while 95% of the outstanding market is owned domestically. The fear is as the non-BOJ holders take serious duration hits and we end up with a situation similar to last year’s UK Gilt crisis where a bubble pops and spills over to global yields. Stay tuned.
We come in this morning with equities flat and Treasury yields down small. Quarterly earnings roll on while we have a big week of economic data, most notably the June JOLT index on Tuesday and July Non-Farm Payroll report on Friday.
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