Due to the expectation that the Federal Reserve will implement quantitative tightening (QT) more aggressively, U.S. bond yields collectively surged by more than 20 basis points overnight, with the rise in short-term bond yields being particularly significant. The key curve that indicates recession also briefly inverted, which has a negative impact on the U.S. economy. Recession fears revive.
The "peaking theory" of inflation is bankrupt. In May, the U.S. Consumer Price Index (CPI) increased by 8.6% year-on-year, once again hitting a 40-year high, and the month-on-month indicator also reached 1%. The core inflation data, excluding volatile food and energy prices, was also higher than expected. This caused the money market to once again increase its bets on the Federal Reserve's aggressive interest rate hikes, and the U.S. bond market also "danced with it."
The key yield curve is inverted
As the U.S. CPI in May exceeded expectations, the market currently expects the Federal Reserve to raise interest rates by 50 basis points at the June, July and September meetings. There is discussion about a one-time interest rate hike of 75 basis points. It is also becoming more and more popular. Michael Darda, chief economist at MKM Partners, said that "we are facing stagflation now" and that "the Fed is still behind the curve."
The market still generally expected earlier this week that there is a high probability that the Federal Reserve will raise interest rates by 50 basis points at once this week, and the probability of raising interest rates by 75 basis points is only about 20%. Barclays is the first major Wall Street institution to predict that the Federal Reserve will raise interest rates by 75 basis points. Last Friday, it predicted that the Federal Reserve would raise interest rates by 75 basis points as soon as this week. Most traders expect there is a 50% chance that the Fed will raise interest rates by 75 basis points in July. However, during the trading session later on Monday, market expectations for a 75 basis point interest rate hike this week rose sharply. JPMorgan Chase and Goldman Sachs revised their expectations in reports to clients on Monday, saying that higher-than-expected inflation data may change the Federal Reserve's "established" interest rate raising strategy. The Federal Reserve is likely to raise interest rates by 75 basis points this week. At the same time, in his speech after the interest rate resolution last month, Powell made it clear that he was not actively considering raising interest rates by 75 basis points. Now, with higher-than-expected inflation, the market also expects that his words may change.
China Business News learned from the Office of the Investment Director of UBS Wealth Management that market concerns about "high inflation forcing the Federal Reserve to tighten monetary policy more aggressively" have once again hit the U.S. bond market. Specifically, the 2-year U.S. Treasury bond yield climbed 33 basis points to 3.38%, hitting a high since 2007 and more than doubling since the beginning of this year. The 5-year U.S. Treasury yield took the lead in rising back to pre-Lehman crisis levels. From a longer-term perspective, the 5-year U.S. Treasury yield has broken through the long-term downward trend since 1981. In addition, the iconic 2-10 year U.S. Treasury yield curve inverted again on Monday after April. The 5-year U.S. Treasury yield is also 17 basis points higher than the 30-year U.S. Treasury yield, recording the largest inversion in 20 years. An inversion of the U.S. Treasury yield curve is often seen as a leading indicator of economic recession.
Michael Pearce, senior U.S. economist at Capital Economics, told China Business News that U.S. inflation data unexpectedly rose in May, and the details of the inflation report also showed that there is little sign that inflationary pressure is easing. This increases the possibility that the Fed will increase interest rates in the coming months, which may prompt the Fed to extend the 50 basis points of interest rate hikes into this fall, and may even lead to a 75 basis point increase in interest rates at the June meeting.
During today’s Asia-Pacific trading session, the 2-year U.S. bond yield further climbed to 3.398%, and the 5-year U.S. bond yield also continued to rise to 3.494%, approaching 3.5%. The 10-year U.S. Treasury yield is at 3.354%, still inverted with the 2-year U.S. Treasury yield. The 30-year U.S. Treasury yield was at 3.338%, with the inversion still reaching 16 basis points.
The risk of recession in the United States has resurfaced
The hawkish interest rate hike panic and the inversion of the key U.S. bond yield curve have also reignited economists' warnings about recession. They believe that the speed of the Federal Reserve's interest rate hikes makes a recession inevitable.
A UBS report believes that the possibility of a U.S. economic recession has increased in the next six months. “The 10-year Treasury yield heading towards 3.5% signals growing concerns that the Fed may lag further behind the yield curve. This, in turn, will give the Fed less room to ‘declare victory’ and ease interest rate hikes.As a result, we believe that the risk of a Fed-induced recession has increased, and the likelihood of a recession in the next six months has also increased. "The report said.
Morgan Stanley CEO James Gorman told a financial conference on Monday that the possibility of a U.S. recession is rising as the Federal Reserve continues to wrestle with inflation, but it is unlikely to be one. A severe recession. “It’s clear that we’re going to have a recession, the odds are 50 to 50 right now. This is higher than the 30% recession risk I forecast earlier. But at this stage we are unlikely to be in a deep or prolonged recession. "Inevitably, this inflation is not temporary, and the Fed will inevitably move faster than they expect," he said. "
Andrew Ticehurst, interest rate strategist at Nomura Holdings, also said: "The inversion of the U.S. bond yield curve shows that market participants have seen the real risk of economic recession. He added that Nomura had been expecting the Fed's interest rate range to eventually be between 3.75% and 4%, and now "the market has definitely turned in that direction."
On the question of whether the U.S. economy will fall into recession, economists The views expressed when participating in the survey run counter to the Fed's position. In a latest survey conducted by foreign media from June 6 to 9, nearly 70% of economists said that the U.S. economy is likely to enter recession next year. Nearly 40% of the 49 respondents to the survey expect the National Bureau of Economic Research (NBER), a research organization that determines when economic recessions will begin and end, to declare a recession in the first or second quarter of 2023. , and another third of the respondents believe that the NBER will declare that the economy will enter a recession in the second half of next year. Only one economist surveyed believes that the U.S. economy will enter a recession this year. Refers to "a significant slowdown in economic activity that will spread to the entire economy and last for more than several months."
Jonathan Wright, an economics professor at Johns Hopkins University, said that although the current situation is different from that of the 1970s. Not the same, but the coexistence of high inflation and economic downturn implies the possibility of stagflation
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