The two-year yield on Treasury bills also peaked at 3.43% last month, but is now trading at 2.91%.
The five-year “break-even rate” – the difference between the yields on 5-year Treasuries and an inflation-protected note of the same duration – slipped to levels last seen in September of the last year, reflecting expectations that US inflation will fall significantly.
As markets appear confident that inflation is being brought under control, central banks have made it clear that in the short term at least, they will continue to raise interest rates aggressively to ensure that they are killing the worst inflation rates in decades.
As markets appear confident that inflation is being brought under control, central banks have made it clear that in the short term at least, they will continue to raise interest rates aggressively to ensure that they are killing the worst inflation rates in decades.Credit:Louie Douvis
The crucial question is whether they can do this without tipping economies into recession, although it must be said that, given the scale of inflation in major economies and the cumbersome policy tools available, soft landings are unlikely.
Avoiding recessions in major economies is also made more difficult as, after massive binges in response to the pandemic, governments have drastically cut spending.
The combination of monetary and fiscal policy tightening, continued global supply chain disruptions, pandemic-inflated global debt levels, and housing markets inflated by more than a decade of ultra-low interest rates creates a set of very restrictive influences.
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Central banks’ determination to kill inflation even as governments revert to more conservative fiscal policies is why some analysts believe we could enter a cycle of recession and then near-boom, with central banks reverting to more expansionary policies, including quantitative easing, once they are convinced they have crushed inflation rates – and their savings.
The volatility of the global environment complicates any assessment.
Russia’s invasion has fundamentally changed global energy markets – oil, gas and thermal coal – as Europe and Japan scramble to replace Russian oil and gas with non-Russian supplies, making hike the price of gas dramatically (although they pulled back a bit as ultra-high prices started to crimp demand).
China’s intermittent economy – driven by its tough COVID policies – is another source of volatility and uncertainty.
While there has been a recent relaxation of some aspects of its zero-COVID approach, this week new outbreaks in Chinese cities have led to more lockdowns.
Avoiding recessions in major economies is also made more difficult as, after massive binges in response to the pandemic, governments have drastically cut spending.
China, while benefiting from its ability to buy Russian energy at a deep discount, is also coming under some pressure from soaring energy costs.
Between its COVID policies, the impact of the sharp spike in commodity prices – including iron ore – earlier this year, and the economic impacts of recent severe floods and droughts, China is experiencing its weakest economic growth. for decades.
The price of iron ore is a barometer of China’s economic activity levels. Three months ago the price was above US$160 per ton. It is now around US$113 a tonne, a clear sign that despite Chinese authorities’ attempts to stimulate the economy through infrastructure investment, the economy is cooling.
The US dollar is strengthening.Credit:Bloomberg
This is probably good for global inflation, but not so good for global growth.
The other sign that the outlook is darkening is the strengthening of the US dollar as risk appetite continues to decline and investors flock to the traditional safe haven of the US Treasuries market.
The Bloomberg Currency Index of Major US Trading Partners shows that the dollar has strengthened by around 10% since the start of this year. This exports, to some extent, inflation and tighter economic conditions to the rest of the world as the cost of imports and dollar-denominated financing costs increase.
The recent fall in commodity prices, despite the impact of the war in Ukraine on Russian and Ukrainian exports of energy, grain and fertilizers, may also to some extent reflect this risk aversion.
Over the past decade there has been a “financialization” of most major commodities – they have become commodities for speculation and investment as well as markets for physical commodities, which could amplify the correlation traditional inverse between the US dollar and commodities. prices.
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On Wednesday in the US, the Fed will release the minutes of last month’s Open Market Committee meeting. At this meeting, the Fed raised its key rate by 75 basis points, its largest increase in nearly 30 years.
These minutes, and U.S. jobs data due on Friday, could provide better insight into the Fed’s view of the future and its likely actions.
Perversely, everyone hopes to see the strengthened prospect of an economic slowdown, or even a recession in the United States, give some hope that central banks will not have to hike interest rates. into the stratosphere and plunge economies into a deep recession. to bring inflation rates under some level of control.
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