The "black swan" of the market: if the United States does not cut interest rates this year, Japan will raise interest rates again!

The pace of the Fed's rate cuts this year and the Bank of Japan's actions after ending negative interest rates have been the focus of market attention. Although the current market consensus is still that the Fed will still maintain the expectation of three interest rate cuts this year, and the Bank of Japan will not rush to raise interest rates, some analysts believe that the Fed may not raise interest rates this year, and the Bank of Japan may raise interest rates early, which will evolve into a black swan event and cause market turmoil. Inflation data will be crucial for how the market consensus evolves in the future.

Will the United States cut interest rates this year? Japan accelerates interest rate hikes?

Former U.S. Treasury Secretary Summers criticized the Fed's eagerness to signal to markets that interest rate cuts are likely in the coming months after the Federal Reserve's March interest rate decision was announced. He said the Fed's underestimation of the neutral policy rate means that policymakers may mistakenly believe that the current interest rate policy is tighter than it actually is, and that "if policymakers misjudge the neutral rate, they don't know whether their policy is promoting or dampening economic growth." ”

Summers believes that the real neutral rate is likely to be at least 4% and that current monetary policy may not be as restrictive as expected, as the economy remains strong and the unemployment rate remains below what the Fed considers to be full employment, so the Fed may need a more cautious monetary policy stance to avoid an overheating economy and runaway inflation.

Similar to Summers, US asset management giant Vanguard does not expect the Fed to cut interest rates in 2024. Shaan Raithatha, senior economist at the agency, said Thursday that the Federal Reserve will keep interest rates unchanged for the rest of the year. Meanwhile, Mark Okada, co-founder and CEO of Sycamore Tree Capital Partners, said last week that there is a high probability that the Fed will not cut interest rates in 2024.

At the same time, the Bank of Japan's latest interest rate decision announced an increase in the benchmark interest rate, signaling the normalization of monetary policy. However, Japan's inflation accelerated to 2.8% year-on-year in February, exceeding the central bank's policy target of 2% for 23 consecutive months, and analysts believe that Japan's real interest rate fell to -2.09% and monetary conditions are more accommodative.

BNP Paribas economist Ryutaro Kono believes that Japan may accelerate the pace of interest rate hikes if rising wages further push prices higher. "In this case, by the end of 2025, the interest rate will exceed 1%. In addition, depending on the exchange rate and how personnel costs are transmitted to prices after April, there is a possibility that the second rate hike will be brought forward to July.

Meanwhile, Bank of Japan Governor Kazuo Ueda previously said that rising prices too fast could lead to further interest rate hikes.

Market mainstream: The Federal Reserve is still dovish, and it is difficult for Japan to raise interest rates in the short term

However, this idea is not mainstream in the market. At present, the mainstream consensus in the market is still that the wording of the Fed's interest rate meeting this week is dovish, and the probability of a rate hike in Japan in the short term is unlikely.

The market reaction is the most real. Before the interest rate meeting, the market believes that the economy will accelerate again and the risk of secondary inflation will increase, so it has continuously compressed the expectation of interest rate cuts this year, and the 10-year U.S. Treasury interest rate has also risen to 4.3% before the meeting. This sent U.S. Treasuries tumbling, the dollar rallying and U.S. stocks rising.

Powell said at a press conference that it would be appropriate to start cutting interest rates at some point this year, that QT tapering would happen soon, and that the goal of the longer cycle would be to return to a predominantly U.S. Treasury bond holding, and that the problem of reserve shortages would not be repeated. Powell said that most officials still believe that confidence in inflation is possible and that interest rates will be cut, but he also acknowledged that the January-February US economic data did not boost the Fed's confidence in the progress of US inflation.

After Powell's speech, the market interpreted it as dovish. According to the analysis, the dot plot where the market focus is still maintained the expectation of three interest rate cuts this year, and has not decreased as feared. This shows that in the eyes of the Federal Reserve, the inflation exceeding expectations at the beginning of the year was only a small twist and turn, and it was not enough to change the path of interest rate cuts, which gave the market a "reassurance". There were also slight changes in the wording of other meeting statements, economic data, etc., but the overall situation was not significant. As a result, U.S. stocks and gold soared, Treasury rates remained around 4.3%, and the dollar weakened.

And although Japan ended its negative interest rate policy, analysts believe that the Bank of Japan will not raise interest rates as aggressively as the Federal Reserve. After all, while emphasizing the fight against inflation, Kazuo Ueda also stressed the importance of maintaining an accommodative monetary policy to support economic growth. Moreover, there is no consensus on how far the Bank of Japan will eventually raise interest rates.

Yusuke Miyairi, a foreign exchange strategist at Nomura International in London, pointed out that "we have not received any clear signals from the governor about future rate hikes, so in this way, it can be seen as a 'dovish rate hike'." Analysts also forecast that the Bank of Japan's policy target rate will be 0.1% by the end of this year, that is, it will not continue to raise interest rates.

Moreover, "Mr. Yen" Sakakihara Hideki also previously believed that the Bank of Japan has completed raising interest rates and may hold on for the rest of 2024 to see how inflation evolves.

Inflation data will be in focus to determine the direction of market consensus

However, the market consensus is based on the economic situation, and economic data may also make the US and Japan stop easing expectations at any time, allowing the current market consensus to turn.

Inflation in the first two months of the year in the United States remained stubbornly high, and the question now is whether the January and February data will be a fortuitous event or a long-term trend.

Powell's opening remarks at Wednesday's press conference began by saying the Fed was fully committed to returning inflation to its 2% target. Some media said that the Fed's statement is equivalent to betting on reputation, because the Fed has been attacked before, and the market believes that the Fed has acted too late to fight inflation.

Some analysts said that Powell's statement on Wednesday injected "a shot in the arm" into the market. But if Powell's expectations for inflation are wrong, the market will "rebel".

As a result, all eyes will be on inflation data in the coming months to assess whether there is evidence that Powell's inflation inflation expectations are correct, otherwise it could become a bigger problem.

In terms of the yen exchange rate, the yen has now hit a four-month low of around 151 against the dollar, and has plummeted against the euro to its lowest level since 2008. Sakakihara noted that if USD/JPY rises to 155-160, the Japanese government may intervene. Intervention is sometimes necessary and effective, and depends on the cause of the event, such as whether the market is overcorrected, he said.

Sakakihara expects USD/JPY to fall to 130 by the end of this year or early 2025, and said that the era of deflation is over and an inflationary period is coming.

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