Short-term interest rates that don't move, long-term interest rates that fall, and reverse interest rates will expand further

The day before yesterday, the Canadian monetary policy meeting, which predicts interest rate hikes in the US, decided to leave it unchanged. This is the conclusion by comparing the signal of a settlement of excessive demand, the lag in monetary policy, and the strength of underlying inflation. The Central Bank of Canada before COVID-19 did not move ahead of the Fed. However, in the interest rate hike curve from the spring of 2022 onwards, there was a noticeable movement that took the lead on the Fed. There was a proactive move, such as a drastic interest rate hike of 1%, stopping interest rate hikes in March, and raising interest rates again in June.

It is self-evident that the economies of Canada and the United States, where the real economy is connected by the USMCA, are linked. There seems to be a high possibility that Canada's policy interest rate will be at the terminal rate (5%) due to the suspension of interest rate hikes this time. Even in the US, where demand is strong, inflation is clearly peaking out. The US will also decide the terminal rate at 5.5-5.75% at the FOMC on November 1, a little later.

For Chairman Powell, the FOMC that marks a turning point is November, not September. Two years ago, we acknowledged that inflation was not temporary, and last year we decided to slow down the pace of interest rate hikes. The final decision to raise interest rates will be made this year. What slowed the pace of interest rate hikes last year was policy changes from the UK bond turmoil and Japan's depreciation of the yen. This is because international coordination was measured in discussions between the IMF and G7 in October.

Amid global inflation, we are in a situation where only the US can raise interest rates in the world. Amid the economic war against Russia and China, the United States cannot overlook the plight of its partner G7. It is certain that interest rate hikes will stop first. If interest rate increases stop, you can buy bonds that can be expected to carry (income gain obtained from that bond within the period).

If there are mottled bonds that can be bought and bonds that cannot be bought, the sale of bonds will stop and the rise in long-term interest rates will disappear. JPMorgan's deposit and loan margin in the 2nd quarter was 261 bp, which is an attractive enough level even if the 2 interest rate hikes (50 bp) disappear. The way of thinking that reverse interest rates will lead to a recession is wrong. Short-term interest rates that don't move and long-term interest rates that fall will continue to be predicted in the future, and there seems to be a high possibility that reverse interest rates will expand further.