I highlighted yesterday the continued weakness in the yen and the issues that could create for BoJ policy in the face of high energy prices where Japan imports most of their needs. Overnight, the 10 yr inflation breakeven rose 4 bps to .84%, the highest since October 2015. The 10 yr JGB yield was up 1 bp to just below .23% and vs the .25% which is the upper end of yield curve control. We are going to have a whole other extension of this bond roller coaster and selloff if the BoJ gets to the point where they need to start tightening monetary policy. Because of YCC though, the BoJ has dramatically slowed the pace of its bond purchases and its balance sheet relative to GDP has remained flattish over the past year.
10 yr Japan Inflation Breakeven
BoJ Balance Sheet as % of GDP
We see all the curve flattening going on but today I want to highlight the amazing speed at which the 2 yr yield has priced in rate hikes when compared to what has actually happened so far. This is a chart of the 3 month T-bill, tied tightly to the actual fed funds rate, and the 2 yr note yield which has priced in the expected hikes. Quite a quick adjustment on rate expectations.
What’s going on in the Northeast? Last week we saw within the NAHB home builder sentiment index a 16 pt drop in the Northeast. In today’s release of the February Architecture Billings Index which was 51.3 vs 51 in January, they said this “Despite the continued healthy demand for design services, activity is plateauing as firms face a myriad of external challenges, from staffing to supply chain disruptions to high inflation and rising interest rates. While the rebound from the pandemic has positively impacted firms in most regions, the prolonged lack of demand for design services in the Northeast is of growing concern.” Maybe this reflects the household and business spread to lower cost, lower tax areas of the country.
A week after the Bank of England raised rates by 25 bps to .75% and one member didn’t want to, UK February CPI rose 6.2% y/o/y and the core was higher by 5.2% y/o/y, both two tenths more than anticipated. The Retail Price Index which is used for inflation linkers, was up by 8.2% y/o/y. As for producer prices, both input and output charges were up sharply. For inputs, by 14.7% y/o/y and for output prices, up 10.1% y/o/y. As wage growth is not close to matching any of this, real wages are falling sharply in the UK. Last week we saw earnings ex bonus’ thru January up 4.8% y/o/y. As all the data was not far from expectations, the 10 yr inflation breakeven is actually down a touch but to a still high 4.28%. After the recent spike, gilt yields are down too as is the pound.
The pain lower income families are experiencing and will continue to do so in light of the higher tax that is inflation is upsetting. Today the UK Chancellor of the Exchequer Rishi Sunak will be in front of parliament today laying out his plan to deal with this.
Core CPI in the UK y/o/y