Fear of a sharp rise in interest rates in the United States and
The recession rocked global markets on Monday, after the release of US inflation figures that beat expectations on Friday.
European stock markets opened mostly in red, After US inflation hit a new high in May at 8.6% annually, well above analysts’ expectations.
The increase in consumer prices accelerated again last month. These numbers caused a sharp decline in the New York Stock Exchange on Friday, 2.73 percent for the Dow Jones Index and 3.52 percent for the Nasdaq. Asia followed the movement. The Tokyo Stock Exchange closed sharply lower by 3.01 percent and the yen fell to its lowest level against the dollar, which was trading at its lowest level since 1998. Shanghai lost 0.89 percent and Hong Kong fell 3.07 percent in previous operations.
The US Central Bank (Fed) monetary committee will meet on Tuesday and Wednesday, and markets are already expecting a 50 basis point adjustment to key interest rates.after a similar rise last month.
But as prices recover, more and more analysts are questioning whether the central bank won’t tighten the screws further by raising interest rates by 75 points, a move that is extremely rare in the Fed’s recent history.
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What can happen after the Fed meeting?
America’s highest inflation in four decades should cause the Federal Reserve to raise interest rates more aggressively this year, and a recession may not be far off.
These are the dramatic signals coming from the markets, which on Monday also provided an overall boost in returns: 10-year repayment rates are at their highest level since 2011, while their two-year equivalents have risen to levels last seen before the global financial crisis, and 30-year yields are at their highest in more than three years.
The Bloomberg Dollar Index reached peaks last seen early in the Covid pandemic, adding to the backdrop that led to a spiraling decline in risky assets. Meanwhile, a widely followed portion of the US yield curve has inverted – buoyed by rising Treasury futures volumes – amid concerns that tighter monetary policy will have a greater impact on economic growth.
Friday’s data showed consumer prices accelerating to a 40-year high. Higher yields and lower stock prices “make sense in the wake of the amazingly strong CPI we saw on Friday,” Matthew Hornbach, global head of macro strategy at Morgan Stanley, said on Bloomberg TV.
Arrival of black swan
Inflation is really the Achilles heel of risk markets. This economy will require higher real rates to slow it down and put some downward pressure on inflation.
Concerns are emerging that the violent pace of monetary tightening will push the world’s largest economy into a recession as traders pile protection against falling stocks, bet on money raised from the world’s “black swan” and buy dollars, among other defensive operations.
The most aggressive US rate hike since 1994 is now seen almost for granted and a “shock” as inflation data pressures the Fed to take drastic action to cool rates.s, which in turn induces intermittent hysteresis reversals in key parts of the yield curve.
“All classic slack trades are ready for takeover,” said Peter Chatwell, head of global macro trading strategies at Mizuho International Plc.
Accelerating inflation and slowing growth have raised World Bank officials’ fears that the global economy is entering a period of stagflation, reminiscent of the 1970s. This is how those concerns manifest themselves in the major markets, in the weakest links.
The index of stagnation in the credit market has jumped higher since 2020 as investors piled into contracts that insure against default among riskier corporate borrowers.
“Inflation is really the Achilles heel of risk markets. This economy will require higher real rates to rein in inflation and put some downward pressure on inflation,” he added.
Market prices are suggesting that the US central bank is likely to make hikes larger than the 50 basis points it has already made in this cycle.
Traders expect an additional 175 basis points adjustment after the Fed’s September decision, which means a half and 75 basis points increase, depending on the interest rate swaps tied to the FOMC rate decision dates.
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Therefore, all eyes will be on Fed Chair Jerome Powell’s statement and post-meeting press conference.Inflation characterization and long-term forecasts of the monetary authority’s federal funds target, the so-called dot plot, will be critical.
The Federal Reserve has not raised the rate by three-quarters of a percentage point since 1994, and a tightening of that volume is fueling concerns about shrinking consumer spending and business activity. Inflation-adjusted benchmark Treasury yields also rose on Monday amid expectations that the Federal Reserve will be more robust.
“10-year Treasury inflation-protected yields rose to around 0.53 percent, the highest since March 2020. A real rate hike will be a critical metric. “On corporate real interest costs, a key objective of the Federal Reserve as it seeks to tighten financial conditions to reduce inflation,” said Hornbach of Morgan Stanley.
But in addition, the combination of collapsing consumer confidence, unexpectedly severe price pressures and expectations of Fed activity are conspiring to create a particularly toxic mix of risky assets, and Rabobank strategists including Richard McGuire.
The inversion of the yield curve “is consistent with the idea that the need to address higher price pressures will cause the Federal Reserve to push the economy into a recession.” This view is consistent with expectations that the Fed will need to ease policy again within two years.
The market is already preparing itself for policy makers to respond to the looming slowdown with further rate cuts, pricing in a quarter point of easing by mid-2024.
With information from Agence France-Presse and Bloomberg
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