There are more and more signs that market participants are increasingly counting on a recession. Yesterday in this direction was indicated by falling government bond yields, widening swap spreads, falling oil prices, weak (European) stock markets and a strong US dollar. Falling oil prices in particular make it unlikely that inflation concerns and expectations of interest rate hikes will return to the markets as price drivers in the short term. While we in Europe are still waiting for the first interest rate hike by the ECB, the question in the US is gaining momentum when and how much they will be lowered. Under these conditions, the executive summary from the FOMC meeting at the beginning of June, which will be released tonight, could be considered “out of date” by investors.
After a brief recovery on Monday, Bund profitability yesterday continued the descent from the past two weeks. The 10Y yield fell by 15 bp to 1.18%, closing at the lowest level since the beginning of June. For the tenth day in a row, the yield of 10Y Bunds was hovering in the daily range above 10 bp. Strong expansion swap spreads They reflected that yesterday’s decline in yields was fueled not only by subdued expectations for interest rates, but also by growing risk concerns. The 10Y EUR swap spread widened by 5 bp to a new high of 89 bp in 2 years. Maturities widened by 4 bp to 78 bp. In the US the yield on 10Y UST fell by 5 bp to 2.83%, after a temporary decline to 2.78%, the lowest level since the end of May.
Other market segments supported the impression that yesterday’s price action was rising fears of recession reflect. First of all, it signaled: oil pricewhich fell almost 10% to $ 103 / bbl. European stock exchange fell by almost 3% for the entire set. This price-profit ratio for DAX fell below the 10 threshold for the first time since March 2020, the respective valuation ratios for Euro STOXX 50 and STOXX Europe 600 also fell to levels we saw recently just after the outbreak of the corona crisis. US stock markets also fell initially. However, in the late afternoon there was a rebound. The S&P 500 gained 2.4% on the daily low and big tech stocks in the NYFANG + index, which rose 5.5%.
The sharp rise in tech stocks may indicate that investors expect only a short phase of high key US interest rates. Though money markets are still price steep Fed rate hike path but: First, the peak of the cycle of interest rate hikes is now visible only at 3.25% (the peak of over 4% was priced in just a few weeks ago). Secondly, forward transactions suggest that the first key rate cut can be expected in the first half of 2023. Historically, it would not be unusual for the US Federal Reserve to move relatively quickly in the opposite direction after hitting the peak of key interest rates. In seven cycles of interest rate increases since 1984, the maximum level of the base interest rate was held only twice for more than a year, with the five remaining episodes being the first reduction in rates on average after five months.
The beneficiary of yesterday’s risk aversion in the market was dollarwhich in some cases rose sharply against all other major currencies. EUR USD dropped from 1.0450 to around 1.0250, a level we last saw in late 2002. EUR-CHF fell like a rock from 1.0020 to 0.9930 in the morning and settled there later in the day. General risk aversion supports the US dollar, while specific European risks, especially the risk of gas supply shortage, weigh on the euro.
What are the chances of a change in sentiment in today’s markets? Positive surprises in American ISM service or in this SHOCKThe report (both at 4:00 PM) may make investors believe that they have been a bit too pessimistic recently. On the other hand, both reports also have the potential to confirm investors’ concerns. The critical variable is arguably the price of oil: rising prices could bring inflation hawks to the scene, while falling oil prices would water the mills of recession prophets …
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The entry for Interest rate cuts – yes, we are talking about interest rate cuts first appeared on the onemarkets blog (HypoVereinsbank – UniCredit Bank AG).