By Bryan Rich
January 9, 4:00 pm EST
Interest rates are on the move today. So is oil. And the latter has a lot to do with the former.
For much of the past quarter we’ve talked about how disconnected the interest rate market has been from the stock market and the economy.
With stocks putting up 20% last year, the economy growing at close to 3% and unemployment at 4%, and with FIVE Fed rate hikes now in this tightening cycle, the yield on the 10-year Treasury has defied logic.
But as we’ve discussed, we should expect that logic to be a little warped when we’re coming out of an unprecedented global economic crisis that was combatted by an unprecedented and globally coordinated monetary policy. And that continues to create dislocations in financial markets. Specifically, when global central banks continue to print money, and indiscriminately buy U.S. Treasurys with that freshly printed money (i.e. the dollars the trade for it), they will keep market rates pinned down. And they have done just that. Of course, that helps fuel the U.S. and global recovery, as it keeps borrowing and service rates cheap for things like mortgages, consumer loans, corporate debt and sovereign debt.
But last month, we talked about where the real anchor now exists for global interest rates. It’s in Japan. As long as Japan is pegging the yield on the 10-year Japanese government bond at zero, they will have license to print unlimited yen, and buy unlimited global government bonds, and anchor rates.
What would move Japan off of that policy? That’s the question. When they do abandon that policy (pegging JGB yields at zero), it will signal the end of QE in Japan and the end of global QE. Rates will go on a tear.
With that the architect of the stimulus program in Japan, Shinzo Abe, said today that he would keep the pedal to the metal, but indicated a possibility that they could achieve their goal of beating deflation this year.
That sent global rates moving. The benchmark 10-year yield jumped to 2.54% today, the highest since March of last year.
Another big influence on rates is, and will be, the price of oil. As we’ve discussed, the price of oil has played a huge role in the Fed’s view toward inflation. And that influence (of oil prices) on the inflation view is shared at other major central banks.
On that note, oil broke above $63 today, the highest levels since 2014.
Remember we looked at this chart for oil back in November, which projected a move toward $80.