The US economy could be headed for a recession, according to a commonly accepted indicator, after inflation there hit a 40-year high higher than expected, raising bets for a 100 basis point rate hike by the Reserve federal later this month.
Data showed rising costs of energy, food and housing pushed the U.S. consumer price index up 9.1% from a year ago in June, from a just over 8% expected.
The surge in inflation has raised fears that the Federal Open Market Committee (FOMC) will raise rates by 100 basis points instead of the 75 basis points previously predicted.
“At the end of the day, inflation dynamics in the United States are on the upswing,” noted Commonwealth Bank of Australia analyst Kristina Clifton.
“Stubbornly high inflation increases the risk that the FOMC will continue to hike aggressively and trigger a recession,” she said. “We expect recession fears to continue to support the dollar.”
Indeed, Bloomberg reported that swap markets showed traders now pricing in a significant possibility that the Fed will grant a 100 basis point hike in July following stronger-than-expected inflation data.
“The worrying aspect of the CPI numbers was the magnitude of the increases,” Shane Oliver, chief economist at AMP, told Reuters, and he said nearly 90% of the components of the U.S. CPI had recorded increases of more than 3%.
Market prices on the Chicago Mercantile Exchange (CME) Fed’s watch tool indicated a 78% chance of a 100 base rise. However, Mr Oliver said it could only be a knee-jerk reaction to the high inflation reading.
“I think the Fed will stick to 75 – which is still a high number – if it goes to 100 it will look like they are panicking. Only time will tell, the Fed is committed unconditionally to drive down inflation.,’ he added.
But Treasury yields rose across the curve, albeit more short-term, and the dollar also surged, sending the euro below parity with the greenback for the first time in two decades.
US two-year yields, which reflect short-term interest rate expectations, hit 3.121%, just off a four-week high, widening the gap with longer-term benchmark yields at 10 years, which were 2.9558 percent. cent, according to Reuters.
A decline in yields on longer-term debt below yields on short-term debt of the same credit quality is called an inverted yield curve. The inverted curve, also known as the negative yield curve, has already proven to be a relatively reliable predictor of a recession.
The so-called inversion of the yield curve, when short-term interest rates are higher than long-term rates, is generally considered an indicator of recession, and the gap between the two has touched 25 points in early Asia, which is the difference between 75 basis points and a 100 basis point Fed rate hike.
One of the US bond market’s most watched indicators of potential recession risk has reached levels last seen in 2007; Bloomberg reported and added that the Treasury curve inversion level was last seen in 2007, just before the global financial crisis.
Carlos Casanova, senior economist at UBP, told Reuters a recession in the United States will mean lower demand for Asian exports as investors give up more ‘risk’ and transfer money out of markets emerging markets, and forcing Asian central banks to raise their own rates. to avoid excessive monetary depreciation.
It is also bad news for global economies and financial markets, especially stocks and currencies on the other side of the exchange rate to the dollar.