This Wednesday, after the Independence Day holiday in the United States, the markets in that country will return to realityand could indeed begin to set the stage for an impending recession.
The resilience of the economy is evident, figure by figure the economic dynamics show dynamism, but, paradoxically, it is not good news, at least for the Fed.
Thus, the markets practically “announce” that there is no escape: the Fed now not only avoids the recession, but even looking for it to happen, to lower inflationary expectations once and for all.
We are facing an enormous contradiction, but there is sense in all this: the United States economy does not stop surprising us with its data that reflects one day in and another its resilience after the recovery from the pandemic, and after the aggressive increases in prices. interest rates (500 basis points in just over a year).
But the market no longer hides its expectations, once again betting heavily on the recession, as reflected in the inversion of the interest rate curve for Treasury bonds.
Thus, while the macroeconomic data reflects that the economy is resisting, it will make the fight against inflation more difficult for the Federal Reserve.
The explanation in the background is simpler than it seems: The central bank, the Fed, he wants inflation back to the 2 percent target, and to do that he needs the economy to cool down. In this sense, the most viable option is a weakening of demand, which will lower prices.
More ‘firewood’ to rates
Some other analysts explain it with other words and tools, to get to the same site.
If each statistic shows that the economy is still holding up: for example, first-quarter GDP has been revised upwards to 2% annualized, consumption remains strong, and the decline in house prices has stabilized, then the The Fed has no other options: it will have to add more fuel to the fire, and it will do so by driving interest rates higher, as well as leaving them there for longer.
This is precisely what is fueling fears of a recession in the markets, and what has made the interest rate curve in the United States once again dominate the conversation in the markets.
ice to the economy
In the hours leading up to the Independence Day holiday, the inversion of the yield curves between two-year and 10-year bonds once again concerned investors.
The inversion of the curves deepened again until reaching 108 basis points; treasury bond, which is usually more linked to the immediate trajectory of interest rates, reported a yield above levels of 4.9 percent, while in the case of the 10-year bond its yield was placed at 3.8 percent.
This difference is significant, it returns to the levels already marked in March of this year and reflects a range that has not been observed since the same month of 1981. For analysts and investors there is not much to do anymore, the recession is getting closer and closer as the only possible solution to reduce inflationary expectations, they have to put “ice” on the economy and the only way is to raise rates.
The inversion of the yield curves has been persistent throughout this year, although it really became evident since the fourth quarter of last year. The opinion is unanimous on the matter: whenever the curves are reversed a recession is imminentonly once in history it has not happened, but everything indicates that this will not be the exception.
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