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.

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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.

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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.

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USD credit crunch

‘A credit crunch has started’ as banks tighten lending by the most on record, Morgan Stanley CIO says

  • The credit crunch stemming from March’s bank crisis has begun, according to Morgan Stanley’s Mike Wilson.
  • Wilson pointed to a big drop in bank lending and tightening credit standards in recent weeks.
  • The data fuels Wilson’s view that the stock market is in for more pain in 2023.

The credit crunch stemming from the fallout of Silicon Valley Bank has begun, with data showing clear tightening of lending standards by banks, according to Morgan Stanley’s top stock strategist Mike Wilson.

In a note on Sunday, the Morgan Stanley CIO said that the last two weeks have shown the steepest decline in lending on record as banks scramble to offset the breakneck pace of deposit flight, which has accelerated in the month since SVB failed.  

“The data suggest a credit crunch has started,” Wilson said in the note, adding that $1 trillion in deposits has been withdrawn from US banks since the Federal Reserve began raising rates a year ago. 

Further illustrating the credit crunch is the most recent small business lending survey, which last week showed that credit availability has seen its largest drop in 20 years, coming alongside the highest interest rates seen in 15 years. 

That’s worrisome for the US economy and markets, which have already been squeezed since the Fed embarked on an aggressive campaign to raise interest rates and bring down inflation.

Tighter financial conditions could raise the risk that the economy falls into a recession this year, as both companies and households experience difficulty obtaining credit. 

The spate of bank failures and the ensuing credit crunch fuel Wilson’s view that stocks are in trouble this year. 

Previously, Wilson forecasted as much as a 20% drop in the S&P 500 in 2023 as corporate earnings drop, with the worst earnings recession since the 2008 recession potentially on tap this year. 

He notes that major indexes holding steady since the SVB episode should not be taken as a sign that everything is fine, but rather an indicator that stocks are at risk of a sudden drop similar to what has been seen in small caps and bank stocks since March. 

“To those investors cheering the softer-than-expected inflation data last week, we would say be careful what you wish for,” Wilson said, pointing to the March Consumer Price Index report, which showed inflation climbing less than expected. “If/when revenues begin to disappoint, that margin degradation can be much more sudden, and that’s when the market can suddenly get in front of the earnings decline we are forecasting,” he added.


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GBPUSD Pond dollar


GBP/USD needs balanced GDP data to climb.
The pound has been positive for several months, benefiting from the surprising economic strength of the UK. On the other hand, the US dollar has fallen behind, but the recent concerns about the global economy have moved the flows toward the safe dollar.
Markets are mostly bearish today, with the only catalyst for their movement being non-farm payroll data.
In order to see the correction of the US dollar, despite the disappointment, we need below $200,000 to force the Federal Reserve to stop raising interest rates. But not so weak that it can ensure the flow of orders in US dollars.
Weak wage growth will also help.
In such a case, GBPUSD has the space to increase levels up to 1.252
But to enter the purchase transaction, one should wait for the failure of the 1.245 level to enter the transaction at this level in the pullback.

GBPUSD long/Buy idea by Alisabbaghi on

Gold and USD

The JOLTS index fell below 10 million for the first time since May 2021.

The JOLTS index fell below 10 million for the first time since May 2021.

The US factory orders index was reported as -0.7%.
US employment statistics – February fell below 10 million jobs, which is the first and most important sign of the end of US interest rate hikes, as well as increased fear of recession.

At the same moment, the price of gold reached over 2000 dollars with strong growth.

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

US growth was not strong in the fourth quarter!

Jobs remain strong

The latest report from the US Department of Labor shows that the number of jobless claims increased relatively last week. It rose 6,000 to 266,000 on a seasonally adjusted basis for the week ending March 26. The rate is in line with economists’ expectations for 265,000. The four-week moving average of claims, which smooths out weekly swings, rose 4,000 last week to 258,500. Despite the increase, the U.S. labor market remains strong, and unemployment insurance claims remain near historic lows. However, the increase in unemployment insurance claimants could be due to the recent increase in Covid-infected cases across the country, which has led to renewed restrictions and quarantines in some areas.

The US economy is expected to continue to grow

It remains to be seen whether this trend will continue in the coming weeks. Additionally, the US Commerce Department cut its estimate for fourth-quarter GDP growth to 6.7% from an annualized rate of 6.9%. This decline is due to a downward revision in consumer spending and business investment. This revision is not unexpected; Because many economists had already predicted that the strong growth seen in the third quarter of 2022 would not continue in the fourth quarter. Despite the downward revision, the US economy is expected to continue growing, albeit at a more moderate pace than last year. The labor market remains tight, with job openings at record highs and unemployment at historic lows. This has led to increased pressure on employers to increase wages and improve working conditions in order to attract and retain workers.

There are concerns about the effect of the increase in inflation and interest rates on economic growth

In response to the tight labor market, some companies have implemented innovative strategies to attract workers, such as offering bonuses, increasing benefits, and providing training and development opportunities. Others have turned to automation and artificial intelligence to help streamline operations and reduce the need for human resources. Overall, the US economy is in a strong position, but there are concerns about the potential impact of rising inflation and interest rates on economic growth. The Federal Reserve has signaled that it may start tapering its asset purchases later this year, which could lead to higher borrowing costs for businesses and consumers.

Rising energy prices and supply chain disruptions put upward pressure on prices

In addition, rising energy prices and supply chain disruptions will put upward pressure on prices, which could lead to higher inflation in the coming months. Despite these challenges, many economists are optimistic about the U.S. economy in the near term. The labor market is expected to remain tight with strong demand for labor in many sectors. This should continue to support consumer spending and economic growth in the coming months. However, the long-term outlook is more uncertain; Because the economy is still struggling with the covid pandemic and other challenges.

Fed decision

Confusion to predict the decisions of the FED

The tension in the banking sector has led to a shift in the expectations of Federal Reserve interest rates. Markets have gone from pricing in a 100.0% increase in interest rates with no reduction this year to only a 17.0% increase with a 91.0% decrease this year.

This change caused a fall in the yield curve and pushed the price of the dollar down because the interest rate increase was out of the pricing.
However, the USD has been highly volatile due to risk sentiment flows and economic data
This creates a turbulent environment for the dollar at the moment, as the growing likelihood of recession and investment pressures should be a positive factor. But for now, if the Federal Reserve confirms in this week’s meeting that they will not raise interest rates again, this should be a negative factor for the US dollar.
On the eve of the Federal Reserve’s monetary policy decision on Wednesday this week, it is very complicated to know what the most likely reaction is from the US.

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