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This Central Bank Will Trigger A Spike In U.S. Interest Rates

December 19, 4:00 pm EST

Remember, the Fed met last week and hiked rates for the third time this year, and the fifth time in the post-crisis hiking cycle.  But as we discussed, the big event for interest rates wasn’t last week, it’s this week.

The Bank of Japan meets on Wednesday and Thursday.   Japan‘s policy on pegging their 10-year yield at zero has been the anchor on global interest rates (weighing on global interest rates).  When they signal a change to that policy, that’s when rates will finally move – and maybe very quickly.

With that in mind, we have the stock market continuing to climb north of +20% on the year.  Economic growth is going to get very close to 3% for the full year of 2017, and yet the benchmark longer term interest rates determined by the market are unchanged for the year.  The yield on the 10 year Treasury is 2.43% this morning (ticking UP today).  We came into the year at 2.43%.

Again, this is the flattening yield curve we discussed last week.  For a world that is constantly looking for the next potential danger or signal for doom, the flattening of the yield curve has been the latest place they’ve been hanging their hats (as what they believe to be a predictor of recession).  But those people seem happy to assume this yield curve indicator is driven by the same behaviors that have led to recessions in past economic periods, ignoring the unprecedented and coordinated global central bank manipulation that has gotten us here and continues to warp the interest rate market.

So now we have the Fed, which has been moving away from emergency policies.  The ECB has signaled an end to QE next year.  And the Bank of Japan is next in line — it’s a matter of when.

So how do things look going into this week’s meeting?  We know the architect of Japan’s economic reform plan, Prime Minister Shinzo Abe, has just followed the American fiscal stimulus movement with a corporate tax cut of his own, but only for companies that will start raising wages for their employees.  He said today that Japan is no longer in a state of deflation. The head of the Bank of Japan has said the economy is in “very good shape.” And that they would consider what is the best level of rate targets to align with changes n the economy, prices and financial conditions.  The recent Tankan survey showed sentiment in the manufacturing community hitting decade and multi-decade highs.

But inflation continues to undershoot in Japan, as it is in the U.S.  Japan is targeting a 2% inflation rate and is running at just 0.8% annualized.

So it’s unlikely that they will give any signal of taking the foot off of the gas this week. But that signal is probably not far off — maybe in January, after U.S. tax cuts are in effect.  What does that mean?  It means our market rates probably make an aggressive move higher early next year (10s in the mid 3s and rates on consumer loans probably jump 150 to 200 basis points higher).

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Bryan: