Analyzing the Future of the US Yield Curve
The gap between short- and long-term US government borrowing costs has recently widened to the widest point since the banking crisis in March. It is expected that this spread will continue to increase over the next week as investors unite in the belief that the Federal Reserve will maintain higher interest rates for a longer period of time.
The US yield curve, specifically the difference between two- and ten-year Treasury yields, has reached a three-month low on Friday, marked at minus 97 basis points. This formation, commonly known as an inverted yield curve, is closely monitored due to its historical association with every US recession over the past 50 years. The yield curve has been inverted since last year.
As two-year yields correspond to interest rate expectations, while ten-year yields reflect growth and inflation, an inverted yield curve signals that investors perceive higher interest rates to impede economic growth. The depth of the inversion does not directly indicate the severity or duration of a recession. However, it does indicate growing confidence in the market that the Federal Reserve’s rate hikes will hinder economic expansion.
This week, the inversion has further deepened and is expected to continue deepening. The Federal Reserve’s hawkishness has prompted investors who previously bet on a year-end interest rate cut to withdraw those bets. Even though the Federal Reserve paused its hiking cycle in June, it signaled its intent to increase interest rates twice more this year through its “dot plot,” with most officials projecting a year-end interest rate of 5.6 percent, up from the current range of 5 to 5.25 percent.
Exploring the Bank of England’s Strategy to Control Inflation
The upcoming week in the UK is expected to be eventful, with May’s inflation data set to be released on Wednesday, followed by the Bank of England’s rate decision on Thursday, and retail sales figures on Friday.
Economists surveyed by Reuters anticipate that annual price growth for May will have eased to 8.5 percent, slightly lower than April’s increase of 8.7 percent. The level of core inflation, which excludes volatile food and energy prices, will be closely monitored after an unexpected surge to 6.8 percent last month.
Experts at Pantheon Macroeconomics predict that May’s headline inflation will align with consensus estimates, primarily driven by decreasing non-core fuel and food prices. On the other hand, service inflation is expected to surge due to rising transportation costs.
In recent times, speculation has arisen regarding the possibility of the Bank of England’s monetary policy committee raising the benchmark rate by 50 basis points next week. This speculation follows stronger-than-anticipated wage data that surprised the market last week, causing two-year government bond yields to reach their highest level since 2008.
However, the general consensus remains a 0.25 percentage point increase to 4.75 percent. Futures markets indicate at least three additional rate hikes this year, peaking at 5.73 percent by the end of December.
Examining the Possible Decline of China’s Benchmark Interest Rate
This week, the People’s Bank of China (PBoC) reduced both the seven-day reverse repo rate and the one-year medium-term lending facility (MLF) rate by 0.1 percentage points. Economists now predict a corresponding decrease in China’s one-year loan prime rate (LPR), which serves as the nation’s benchmark interest rate.
While the LPR is not directly set by the central bank, it is calculated by adding the MLF rate to a spread based on loans offered by China’s largest banks to their top clients. Generally, a reduction in the MLF is followed by a similar adjustment to the LPR. However, the PBoC has the ability to indirectly influence the cost of lending by using “window guidance,” exerting pressure on banks to lower rates even further.
Nonetheless, analysts at Goldman Sachs only expect a 0.1 percentage point reduction for the one-year and five-year LPRs on June 20. Instead of a larger cut, they propose that a combination of monetary policy easing and fiscal policy support could more effectively bolster overall economic growth.
Goldman Sachs further adds that the reduction in interest rates could facilitate additional fiscal support and property expansion in the months to come if economic growth remains sluggish. However, the widespread anticipation of a 0.1 percentage point decline and dissatisfaction with the lack of substantial policy support from Beijing thus far means that a more significant drop in the LPRs could elicit a rally in Chinese equities.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
