The sharp move higher in yields outside of US has been an important driver of US dollar weakness at the start of this year. The 10-year JGB yield hit a fresh year to date high overnight of 1.58% and has now risen by around 40 basis points year to date.
The ongoing adjustment higher in Japanese yields was encouraged further overnight by the release of the latest labour cash earnings report for January. The report revealed that base salaries for full-time workers, the pay gauge that smooths out distortions from survey sample changes and is the BoJ’s preferred measure, rose by 3.0% in January up from 2.8% in December. Governor Ueda has previously stated that a rise of around 3% would be consistent with meeting their 2.0% inflation target. The report adds to building speculation amongst Japanese rate market participants that the BoJ will hike rates again by June (14bps) or July (20bps) policy meetings. There are even 7bps of hikes priced in for the May policy meeting. An earlier rate hike from the BoJ would encourage market expectations that the BoJ could lift the policy rate up to 1.00% by the end of this year.
The move higher in German government bond yields last week was even bigger rising by around 40bps to 2.84% and moving closer to the high from October 2023 at 3.03%. Chancellor-in-waiting Friedrich Merz’s plans for a significant loosening of fiscal policy including increased spending on defence and infrastructure have lifted government borrowing costs in Europe and economic growth expectations proving a tailwind in the near-term for the euro and European equities. Bloomberg have reported over the weekend that Friedrich Merz is open to making concessions to the Greens to secure support for constitutional changes required to modify the debt brake. The report stated that military support for Ukraine could be incorporated into the defence package and climate change initiative would “naturally” be included in the list of infrastructure projects to be financed by a planned EUR500 special fund. To secure the two-thirds majority needed overcome institutional barriers, Friedrich Merz needs the support of his CDU/CSU parties, the SPD and the Greens. Last week’s outsized market reaction highlights that investors are very confident that plans for increased defence and infrastructure investment will be passed in parliament.
