Pro Perspectives 6/28/23





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June 28, 2023

The four most important central bankers in the world sat on a stage in Portugal today and fielded questions spanning from the inflation outlook and rate path to geopolitical concerns (Russia and China), fiscal policy, digital currencies, and AI. 
They all continued to talk about doing more to get inflation to target.
And yet benchmark 10-year government bond yields, in each case, went lower on the day.
In fact, if we look at the most important global (market) interest rate (the U.S. 10-year yield), it continues to trade comfortably under 4%, despite a Fed that is setting expectations for a Fed Funds rate of 5.5% (or higher).
As we've discussed here in my daily notes, this 4%+ area on the U.S. 10-year yield, has been Kryptonite for global financial stability.
But as long as this guy on the left (picture below) continues to do what he's doing, the three on his right can do what they're doing ("normalizing" rates) without sacrificing the global financial system and economy — and it's in large part, because these market interest rates (in the U.S., EU and UK) have remained relatively subdued (relative to the inflation picture of the past two years, and the respective rate paths).   
The guy on the left is the Governor of the Bank of Japan, Kazuo Ueda.  He was the most important person in the room today.  He's the only one in the room trying to get inflation UP to 2%, and therefore is the only one in the room with negative interest rates (still), and printing yen each month and buying both domestic and global assets with that freshly printed yen (with no limits).
With that, guess who has overtaken China as the biggest foreign buyer of U.S. Treasuries. 
So, this BOJ policy not only suppresses Japanese government bond yields, and promotes inflation and economic growth in Japan, it also suppresses the U.S. benchmark government bond yield (the 10-year yield), and has served as a liquidity offset (to a degree) to the Fed's tightening.
So, the question was asked of all of the central bankers today, "do you coordinate?"  They dodged the question.  But the answer is, yes.  This is well coordinated.   This "normalization of rates" in the U.S. and Europe only works with assistance of the Bank of Japan.
And as we discussed a couple of weeks ago, what's in it for Japan? 
The world gives Japan the greenlight to devalue the yen, inflate away the world's largest debt load, and increase export competitiveness (through a weaker currency).  It's all happening.