recession economy

10 Year Treasury reaches 5%, an alarm for risky assets

The 10-year Treasury bond yield is widely recognized as the benchmark for the global cost of capital and a measure of risk-free returns. Consequently, the disparity between the earnings yield of the S&P 500 index and the yield on the 10-year Treasury bond represents the risk premium associated with stocks.

Stock risk represents the degree to which stocks are perceived as an appealing investment in comparison to other asset classes. In the present circumstances, stock risk has plummeted to near-zero levels, signifying that stockholders are not being rewarded for assuming additional risk. This situation has created significant pressure within the stock market.

The current level of risk is at its lowest point in the past two decades. This decline in risk can be attributed to various factors, including the rise in the dollar index. However, this situation carries substantial implications, particularly for economically disadvantaged countries. It makes it increasingly challenging and costly for these nations to service and repay their debts.

The convergence of these factors, with stock risk hitting historic lows and the strengthening of the dollar, underscores the complex dynamics impacting both global financial markets and the economic well-being of nations with high debt burdens.

This phenomenon demands careful monitoring and analysis as it can have ripple effects throughout the financial world and international debt markets.

The yield curve is the difference between the yields of ten-year and two-year bonds; In normal economic conditions, naturally, the yield of ten-year bonds should be higher than the yield of two-year bonds.

Inversion means that the yield of two-year bonds is higher than the yield of ten-year bonds; Since the 1970s, whenever there has been an inversion of the yield curve, we have seen a recession in the coming months.

Due to the existence of inflation and the increase in yield of bonds due to the increase in interest rates, it is not possible to get a definite recession signal from the current inversion and more data needs to be examined.

A recession is a period of economic decline characterized by a decrease in economic activity, rising unemployment rates, and reduced consumer spending. During a recession, the concept of the “Dollar smile” refers to a graphical representation of the U.S. dollar’s exchange rate. It illustrates that the dollar tends to strengthen during both economic downturns and periods of strong economic growth, forming a smile-like shape on a chart. This phenomenon suggests that investors often seek the safety of the U.S. dollar as a global reserve currency during times of uncertainty, making it a preferred asset in their portfolios.

The risk of recession is closer than ever

A sharp inversion of the yield curve and the possibility of recession

The yield curve is the difference between the yields of ten-year and two-year bonds; In normal economic conditions, naturally, the yield of ten-year bonds should be higher than the yield of two-year bonds.

Inversion means that the yield of two-year bonds is higher than the yield of ten-year bonds; Since the 1970s, whenever there has been an inversion of the yield curve, we have seen a recession in the coming months.

Due to the existence of inflation and the increase in yield of bonds due to the increase in interest rates, it is not possible to get a definite recession signal from the current inversion and more data needs to be examined.

🇺🇸 🇪🇺 🇬🇧 🇨🇦 🇯🇵 🇨🇭 🇦🇹 🇳🇿

Leave a Reply

ECB rate hike But makes EUR weak!

This rate hike, is the tenth consecutive policy rate hike since July last year, hiking all interest rates by 25bp and the rate is 4.5 right now. Higher inflation and inflation forecasts look like the main drivers of the hike. The ECB’s communication is clear: today was the last hike in the current cycle

This announcement could potentially lead to some market reactions. Traders, accustomed to these consecutive rate hikes, may view this as the end of the cycle. Consequently, the EUR currency might experience a weakening effect. As a result, it is important for market participants to adjust their strategies accordingly, considering the implications of this final rate hike by the ECB.

The European Central Bank (ECB) decided to raise interest rates for the tenth consecutive time since last July. This move was driven by a greater concern about the fear of not fully controlling inflation and the risk of ending the rate hikes too soon, rather than the increasing risk of recession in the eurozone. Following a total increase of 450 basis points, the ECB’s main policy rates are now at a historic high.

More insights into the reasons behind this decision and the discussions that took place will be shared during the press conference, scheduled to begin at 2:45 pm CET. At the moment, it is evident that the ECB is deeply troubled by inflation. This includes both the current inflation rate and the anticipated future inflation, as indicated by the latest ECB staff projections, which foresee headline inflation reaching 3.2% in 2024.

You might be wondering why the ECB isn’t taking a step back and waiting to assess the full impact of the previous rate hikes. The answer is straightforward: it’s about maintaining credibility. The ECB’s primary responsibility is to ensure price stability, which the eurozone has not experienced for nearly three years. While the recent surge in inflation is primarily influenced by factors beyond the ECB’s direct control, the ECB must demonstrate its commitment to curbing it. The potential consequences, such as a more pronounced economic slowdown in the eurozone, are of lesser concern to the ECB, at least for now.

Looking ahead, if the economy weakens further and a disinflationary trend gains momentum, it will become increasingly challenging to justify additional rate hikes before the year’s end. The official communication’s statement that “based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target” suggests that today’s rate hike may well be the final one.

In summary, today’s interest rate hike not only bolsters the ECB’s credibility but also signals the end of the current rate-hiking cycle.

🇺🇸 🇪🇺 🇬🇧 🇨🇦 🇯🇵 🇨🇭 🇦🇹 🇳🇿

Leave a Reply

federal reserve

FED interest rate hike probability

Based on the latest market pricing, the probability of an interest rate hike by the Federal Reserve in November has increased to 52%

The rise in expectations followed a surprise survey of the services sector by the Institute for Supply Management in August, which showed an acceleration in economic activity, including prices paid. The overall index rose to 54.5 from 52.5, and the prices sub-index increased from 56.8 to 58.9, reflecting rising price pressures in the economy. Market participants are currently grappling with uncertainty about how much the Federal Reserve will raise interest rates and how long interest rates will remain high. Federal Reserve officials have made it clear they will keep interest rates on hold for now, but will closely monitor economic data to determine their next steps. While some economic indicators have begun to moderate, the strong performance of the US services sector serves as a forward-looking indicator of continued economic strength.

An interesting perspective to consider is that earlier in the year, there was considerable talk of an impending recession, causing companies to take a cautious approach and potentially causing consumers to cut back on spending as well. However, the predicted recession never materialized and companies now find themselves with empty inventories but still experiencing high demand. As a result, they are putting aside their previous concerns and are actively investing in replenishing their inventories. It is important to realize that most of the stagnation is caused by psychological factors and this psychological barrier may have been removed, at least from a business perspective.

However, the impact of higher interest rates on consumers, especially in terms of the affordability of items such as new cars and mortgages, can be a gradual process. The market is currently pricing in an 89 basis point cut in interest rates by December 2024, but that forecast still depends on how the economic data unfolds. The possibility of higher interest rates for a longer period is certainly a possibility. Currently, the key point of these developments is the strengthening of the dollar in the currency market; Because expectations of a possible increase in interest rates in November continue to affect currency valuation and financial markets.

🇺🇸 🇪🇺 🇬🇧 🇨🇦

Leave a Reply

Australia: Reserve Bank surprises with 25bp hike

The “pause to assess” seems to have ignored the improvement in inflation

At its previous meeting in April, the Reserve Bank of Australia (RBA) left rates unchanged, “…to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook…” In our view, the most relevant data since then was the March inflation print, which showed annual inflation dropping to 6.3%YoY, well below the 8.4% December peak. We anticipate further quite rapid declines in inflation over the coming months, as high base effects from last year drop out, and as the boost to inflation from rents subsides as it has already started doing. That said, the April inflation data might drift sideways before the next leg down recommences. 

Meanwhile, the rate of wage-price increases remains very benign at 3.3%YoY, and the latest statement’s reference to “…Unit labour costs are also rising briskly, with productivity growth remaining subdued” seems to be confusing the cyclical slowdown in growth and its negative impact on productivity (which is simply a residual of growth and labour inputs) with something that is structurally inflationary, which we don’t believe is the case.

Governor Lowe has a very different perspective to us, and also it appears to the majority of other forecasters who were also looking for no change in rates at this meeting. The accompanying statement that came alongside the RBA’s decision says of their forecasts that “…it takes a couple of years before inflation returns to the top of the target range; inflation is expected to be 4½ per cent in 2023 and 3 per cent in mid-2025”. We would be very surprised if it took anything like this long. History will show whether we or Governor Lowe are right, and in our view, sooner than the RBA might imagine. 

Forward guidance lacks consistency 

Not only did today’s hike take markets by surprise, but the comment that “…Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe”, also seems to be at odds with the decision to change to that wording at the March meeting, downgrading the previous wording from “…further increases in interest rates will be needed over the months ahead”. At the time, this change was widely understood to mean that from multiple anticipated hikes, only one more hike was then expected. Now we have had that one, but it still sounds as if the RBA is looking to deliver more, despite progress on inflation. It certainly feels as if whatever message the RBA is trying to convey, they aren’t getting it across very effectively.  

Markets had to do quite a lot of adjusting to take on board the RBA’s shock decision. The AUD shot back up over 67 cents and 2Y Australian government bond yields rose more than 26bp with a smaller 13.7bp rise in 10Y government bonds. 

What to do with our forecasts?

We had been on the verge of reducing our previous cash rate forecast peak rate from 3.85% to 3.6%. But following today’s decision, we will no longer need to do so. The question remains, should we push this higher to 4.1% or above?

Our inclination right now is not to do so. This latest hike didn’t look necessary to us in order to bring inflation down, and the forward guidance contained in the latest statement is also not particularly convincing. Like the RBA, we will watch the data before making any further decisions. And the April inflation print might not be too helpful to our case – we expect it may go sideways in year-on-year terms before moving lower again thereafter. But beyond the very short-term, our base expectation remains that the rate hikes that have already been implemented will be enough to continue to deliver progress on inflation. And if we get more, then it reduces the chances of achieving a soft landing, and we may begin to see that reflected in lower longer tenor bond yields if the RBA follows through on its latest hawkish guidance. 

Leave a Reply

EURUSD flag forex

ECB and FED monetary policies’ differences will expand the Euro-Dollar currency pair to high levels.

The US dollar failed to sustain gains on Wednesday, strengthening EUR/USD. As financial markets falter, the euro-dollar continues to move.

Inflation in the euro area as a whole was confirmed at 6.9 percent annually in March. European Central Bank (ECB) officials continue to suggest interest rate hikes in the future. Philip Lane, the ECB’s chief economist, said a May hike was likely and the data would determine interest rates.

The S&P Global PMI provides new information on economic activity. Isabelle Schnabel pointed out that while inflation has started to ease, core inflation is holding steady. On Thursday, the European Central Bank will publish the minutes of its latest meeting. The 25 basis point rate hike in May is fully priced.

As for the Federal Reserve, policymakers are also seeing more hikes. James Bullard favors a further half-percent contraction as the labor market looks “very, very strong.” Rafael Bostic would prefer just one more rate hike and a long pause. According to Bej’s book, economic activity has “changed little” in recent weeks. The CME FedWatch tool shows an 83 percent chance of an interest rate hike in May, compared with 70 percent a week earlier. Thursday’s US index includes jobless claims, the Philly Fed and home sales.

The EUR/USD pair is waiting for the next catalyst that could push it above 1.1000 or extend the downtrend. If market sentiment favors risk assets, the euro should benefit as well.
For this purpose, in order to ensure the entry into the purchase transaction, we must wait for the failure from the level of 1.098 according to the risks in order to enter the purchase transaction in order to return and correct again to this rate. Buyers will target the level of 1.1044. A drop below the support level of 1.0947 will invalidate the bullish scenario.

EURUSD is trading in a range with a clear ceiling at 1.09776 holding it back for several sessions. While the broad trend is bullish, recent days have seen painful trading. Resistance remains at 1.09776 and then 1.10. Support remains at 1.0947.

Both the Federal Reserve and the European Central Bank will raise interest rates in two weeks. But several details remain unknown. Will the European Central Bank increase by 25 or half points? Will the Fed’s 25 percent hike be the last rate hike?

The upcoming release of S&P Global preliminary PMIs for April could help set direction. Basically, slightly weaker data from the US will resume the bullish trend of the currency pair after fears of a recession. Investors fear that the Federal Reserve will push the US into a recession that will affect the entire world.

The most important US service sector PMI. At the end of the day, Fed officials’ comments — the last before the bank’s shutdown period — will also have an impact.

Leave a Reply

GBP england inflation

High UK inflation, helps to a rate hike

Today’s unexpectedly high CPI growth and the above-consensus reading on core inflation means is now more likely another next month 25bp rate hike from the BOE (Bank of England).

Although these data all indicate high inflation and higher-than-expected costs for the UK, it should be taken into account that UK inflation has been on a downward trend in the past few months.

core CPI stayed at 6.2%, having been expected to slip back towards 6%. Headline inflation unexpectedly stayed in double-digits at 10.1%, though that will start to change in April when the effect of last year’s electricity/gas price hike filters out of the annual comparison. We expect headline CPI to reach the 8% area next month, 5% by summer and roughly 3% around year-end on current trends.

The core CPI printed at 6.2% as expected (prev was 6%), while headline inflation was unexpectedly at 10.1%. However, the effect of last year’s electricity/gas price hike will filter out in April, and headline CPI is expected to reach 8% next month, 5% by summer, and roughly 3% around year-end.

Core CPI is much more important for BOE. Because service-sector inflation trends are more persistent and relevant over the long term for monetary policy.

Instead, it is core goods inflation that is proving much stickier than expected.

with the clear disinflationary trend in durable goods, We doubt high inflation will last given improving supply chains, lower input costs, as well as the lower orders-to-inventory ratios we’ve seen in the surveys over recent months. The Bank of England itself said something similar in its most recent set of meeting minutes.

There is a clear trend of disinflation in durable goods, and the improving supply chains and lower input costs suggest that high inflation will not last. The Bank of England also expressed a similar sentiment in their recent meeting minutes.

However, the data was high enough to push the pound higher across all currency pairs.
The thing is, in this situation, we cannot be very confident about the continued growth of the pound, and even with this positive sentiment, we cannot propose a decline for the pound. because all the data is priced until next BOE meeting, For now, patience is the best option.

Leave a Reply

Where will the Fed rate hike end?

Powell has repeatedly cited the strong labor market as one of the reasons for allowing interest rate hikes at FOMC meetings. But how far does this strong labor market stretch?

One of the reasons why the profits of American companies have not decreased yet is high inflation. High inflation has kept their profit margin high and made the US GDP not decrease quickly. Also, the increase in wages in America continues and this causes pressure on companies and reduces the profit margin of companies. Therefore, we are witnessing a lot of layoffs from big companies. This means that companies don’t want to take risks and incur high costs by increasing wages and the number of workers.

Small businesses are filing for bankruptcy at a higher rate

If the Federal Reserve continues to increase the interest rate relying on the strong labor market and low unemployment rate, it will put a lot of pressure on the companies and soon the unemployment rate will increase because of this.

This could be a major recession. Recession with high inflation. Inflationary stagnation

For this reason, most experts and analyzers believe that interest rate increases cannot continue and we are almost at the end of this cycle.
By completing the hawkish monetary policies, good sentiment will be brought to the stock market, which can continue the economic growth and the dynamics of the labor market for U.S

Wells Fargo Financial Institution

The Federal Reserve will raise interest rates, but the end of the monetary contraction cycle is coming!

Wells Fargo Financial Institution: The Federal Reserve will increase interest rates, but the end of the monetary contraction cycle is coming!

The Federal Reserve increased its interest rate by 0.25% to 4.75-5%. Federal Reserve policymakers have raised interest rates by 4.75% over the past 12 months, the fastest rate of monetary tightening since the early 1980s. The Federal Reserve continued to maintain a relatively optimistic assessment of the current state of the economy. However, the central bank noted that recent developments will likely lead to tighter credit conditions and likely affect economic activity; Although the extent of these effects is unclear.

Previously, the Fed thought that a sustained increase in interest rates would be needed to bring inflation back to its 2 percent target, but now it thinks that some additional accommodative monetary policy may be in order. In short, the end of the Fed’s monetary tightening cycle appears to be coming. The median forecast for the terminal interest rate was only 0.25% higher than the previous forecast, and we expect the Fed to deliver another 0.25% rate hike at its next meeting.

Bank Of England BOE GBP

Bank of England hikes by 25bp

7 members out of 9 voting members of the Bank of England voted to increase and 2 members voted not to change the interest rate.

Bank of England monetary statement

Second-quarter inflation is likely to be lower than forecast in February due to longer-term energy price caps and lower wholesale prices.

If there are signs of continued price pressures, further tightening of monetary policy is necessary.

The UK banking system has strong capital and liquidity and remains resilient.

Unexpectedly strong core inflation in February reflects clothing prices that may not last long.

The UK banking system is well placed to support the economy, including in a period of higher interest rates.

We will continue to pay particular attention to UK credit conditions.

Wage growth is likely to ease slightly faster than forecast in February as inflation expectations ease.

The fiscal support in March’s budget would boost GDP by around 0.3% in subsequent years.

Businesses expect inflation next year to reach 5.6 percent in the three months to February, compared with 6.2 percent in the three months to November.

No increase in the unemployment rate is forecast and we forecast 0.2% employment growth in the second quarter, up from the -0.4% forecast in February.

Subscribe toour newsletter!

Exclusive offers, news, and promotions delivered to your inbox. Never miss a discount again.
Privacy Settings
We use cookies to enhance your experience while using our website. If you are using our Services via a browser you can restrict, block or remove cookies through your web browser settings. We also use content and scripts from third parties that may use tracking technologies. You can selectively provide your consent below to allow such third-party embeds. For complete information about the cookies we use, data we collect, and how we process them, please check our Privacy Policy
Consent to display content from - Youtube
Consent to display content from - Vimeo
Google Maps
Consent to display content from - Google