Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 26/09/23
Real yields on long-term US Treasury securities increased at their highest level since 2009 (+2.17%)
Key Takeaways
In the past week, global equity markets lost ground, as long-term government bond real yields surged, recording their highest level since 2009 due to the higher-for-longer message from the Federal Reserve, the ongoing reduction in its balance sheet and the elevated risk of unexpected inflation.
The Federal Reserve kept the Federal Funds Rate unchanged at 5.25%-5.50%, in order to assess the effects on (future) output and inflation of the insofar monetary policy tightening. The Fed has raised short-term rates by +525 bps since March 2022, while continues to reduce its holdings of Treasury securities and agency mortgage-backed securities ($7.5 trillion or 28% of US GDP) at a pace of $95 billion per month.
Economic projections by the Fed continue to point to an additional 25 basis points increase by end-2023 (5.50% - 5.75%). Equally importantly, the median estimate for 2024 was revised higher by +50 bps to 5.0% - 5.25%, suggesting a more conservative normalization path for interest rates, from restrictive levels. Market implied expectations for the next year moved only slightly.
Output projections were revised higher, supporting the soft-landing narrative. The Fed anticipates real GDP growth of +2.1% year-over-year in Q4:2023 and +1.5% in Q4:2024, from +1.0% and +1.1%, respectively, three months ago. The unemployment rate expected path was revised lower by 0.3 to 0.4 pps across the forecasting horizon to circa 4.0%, reflecting strong economic growth. Finally, the baseline inflation outlook is for a continuing deceleration, from +3.3% year-over-year in Q4:2023 to +2.5% in Q4:2024 and +2.2% in Q4:2025.
At the same time, elevated geopolitical tensions, the possibility of a US Federal Government shutdown and the ongoing United Auto Workers (UAW) strike weigh on sentiment, increasing equity market volatility. The S&P500 ended the week down by circa -3%, recording the largest weekly decline since March 2023.
With less than one week before the end of the US Fiscal Year, the US Congress must pass several appropriation bills or approve a stopgap temporarily funding measure, called a continuing resolution (CR) before the September 30 deadline, to avert a Federal Government shutdown.
On Friday, the UAW union decided to expand its strike against General Motors and Stellantis at additional 38 plants across 20 states, in response to the lack of progress in negotiations. Overall, 5.6k additional workers will join the 12.7k workers who are already on strike. On the contrary, no further strikes would be initiated against Ford, as substantial progress has been made with Ford deciding to reinstate the cost-of-living adjustment (COLA) formula that offsets increases in inflation and was suspended in 2009.
Regarding China/EU relations, less than two weeks since the European Commission President Ursula von der Leyen’s announcement that the EC will launch an anti-subsidy investigation into Chinese EVs, the EU Trade Commissioner Dombrovskis visited China to explain that the probe aims to create fairer trading practices. The Commissioner called for a more balanced trade as the EU posted a goods trade deficit with China of almost €400 billion in 2022 or -2.5% of EU GDP.
Key Takeaways
In the past week, global equity markets lost ground, as long-term government bond real yields surged, recording their highest level since 2009 due to the higher-for-longer message from the Federal Reserve, the ongoing reduction in its balance sheet and the elevated risk of unexpected inflation.
The Federal Reserve kept the Federal Funds Rate unchanged at 5.25%-5.50%, in order to assess the effects on (future) output and inflation of the insofar monetary policy tightening. The Fed has raised short-term rates by +525 bps since March 2022, while continues to reduce its holdings of Treasury securities and agency mortgage-backed securities ($7.5 trillion or 28% of US GDP) at a pace of $95 billion per month.
Economic projections by the Fed continue to point to an additional 25 basis points increase by end-2023 (5.50% - 5.75%). Equally importantly, the median estimate for 2024 was revised higher by +50 bps to 5.0% - 5.25%, suggesting a more conservative normalization path for interest rates, from restrictive levels. Market implied expectations for the next year moved only slightly.
Output projections were revised higher, supporting the soft-landing narrative. The Fed anticipates real GDP growth of +2.1% year-over-year in Q4:2023 and +1.5% in Q4:2024, from +1.0% and +1.1%, respectively, three months ago. The unemployment rate expected path was revised lower by 0.3 to 0.4 pps across the forecasting horizon to circa 4.0%, reflecting strong economic growth. Finally, the baseline inflation outlook is for a continuing deceleration, from +3.3% year-over-year in Q4:2023 to +2.5% in Q4:2024 and +2.2% in Q4:2025.
At the same time, elevated geopolitical tensions, the possibility of a US Federal Government shutdown and the ongoing United Auto Workers (UAW) strike weigh on sentiment, increasing equity market volatility. The S&P500 ended the week down by circa -3%, recording the largest weekly decline since March 2023.
With less than one week before the end of the US Fiscal Year, the US Congress must pass several appropriation bills or approve a stopgap temporarily funding measure, called a continuing resolution (CR) before the September 30 deadline, to avert a Federal Government shutdown.
On Friday, the UAW union decided to expand its strike against General Motors and Stellantis at additional 38 plants across 20 states, in response to the lack of progress in negotiations. Overall, 5.6k additional workers will join the 12.7k workers who are already on strike. On the contrary, no further strikes would be initiated against Ford, as substantial progress has been made with Ford deciding to reinstate the cost-of-living adjustment (COLA) formula that offsets increases in inflation and was suspended in 2009.
Regarding China/EU relations, less than two weeks since the European Commission President Ursula von der Leyen’s announcement that the EC will launch an anti-subsidy investigation into Chinese EVs, the EU Trade Commissioner Dombrovskis visited China to explain that the probe aims to create fairer trading practices. The Commissioner called for a more balanced trade as the EU posted a goods trade deficit with China of almost €400 billion in 2022 or -2.5% of EU GDP.