Recession signals and pricing With the strong recession signals, the US 10-year yield fell below 2-year yield, making a pricing that has not been seen since 2007. At the same time, the dollar index saw 108.5, its highest level since October 2002.
Bond markets and rotation In general, there are too many variables that fuel global growth concerns. These variables form a cluster that contributes negatively to recession under the evolution of economic, geostrategic and monetary policies groups. In such a conjuncture, there is a market interaction in the form of avoiding the phenomenon of recession.
In bond markets, it was remembered that US bonds are a safe haven. We see that within the framework of the risk portfolio approach, stock and bond rotation becomes operational with the hedging perspective. At the same time, the expectation that the Fed will slow down the pace of rate hikes in the broad term, and even start to loosen again after a certain point, seems to be a phenomenon included in the movement in market interest rates at the moment.
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DXY, Euro and USA 2-10 year spread comparison
Dollar index The dollar index is at the highest levels of recent years and is quite dominant compared to other currencies. Short-term Fed expectations are still quite aggressive. The hawkish structure within the Fed has shown a transition from two doses to three doses of rate hikes within the framework of the inflation conjuncture, and the high inflation data announced today seem to predominate these views. In this context, the July meeting will bring another 75 bps rate hike.
Conclusion? In June, the CPI renewed the peak of more than 40 years. 2-year bond yields are higher than 10-year bond yields, with an inverted yield curve historically considered a reliable indicator of recession. The increasing presence of recession indicators would normally be expected to slow the Fed’s tightening. However, the Fed is more likely to approach this perspective in the medium term than in the short term. On the other hand, there will be an ECB that will not avoid the crisis, but will also need to maintain its interest rate-raising perspective.
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