BOJ Won’t Upset The Global Interest Rate Applecart

April 26, 2:30 pm EST

We get a close above 3% for the 10-year yield today. This continues to capture the attention of markets, as we made another run at the 200-day moving average this morning in the S&P 500.

With all of the attention on rates, this makes the central meetings over the next 36-hours interesting.  We’ll hear from the European Central Bank tomorrow morning, and the Bank of Japan tomorrow night.

Remember, we have an historic divergence in monetary policy path of U.S. relative to that of rest of the world, particularly Europe and Japan.  Here’s a great graphic by the Council of Foreign Relations …

Source: © OpenStreetMap contributors, Council of Foreign Relations

You can see the U.S. and Canada are normalizing rates coming out of the global economic crisis of the past decade.  And the rest of the world is still trying to juice the economy with more aggressive monetary stimulus.

In a normal world, global capital flows into countries that are growing, with interest rates that are rising.  That hasn’t translated in this post-crisis world.  The Fed has been hiking rates since 2015.  And the dollar index is actually lower than the levels from which the Fed started its rate normalization program.

Why has the dollar not taken off?  Because the exit of emergency level policies in the U.S., and the improvements in the U.S. economy, have paved the way for exits of emergency policies in Europe and Japan.  That has promoted global capital to flow out of the dollar (where it had been parked for safety throughout much of the crisis) and back to domestic economies.

Still, as we’ve discussed, the Bank of Japan’s QE program still plays an important role in the stability of global interest rates.  If they were to telegraph the winding down of QE (too early), it would accelerate the pace of the move in our 10-year yield.  Don’t expect that to happen.

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