Asian markets are seeing a downturn, reflecting a global bond market sell-off due to fears of prolonged high interest rates. This has affected various assets, with global equities taking a significant hit.
The ISM manufacturing data and the JOLTS report suggest a hawkish outlook. The US factory sector, in contraction for 11 months, shows signs of potential expansion. The JOLTS report highlighted a large gap between labour supply and demand, leading to increased wages.
Amid strong economic data and predictions of higher rates from experts like Jamie Dimon and Ray Dalio, bondholders are nervous. Navigating such bond markets requires courage.
The US economy remains strong, with an estimated annualized growth rate of 4.2% in Q3, up from 2.1% in Q2. This is surprising given the Federal Reserve's aggressive monetary policy tightening. Factors like pent-up pandemic demand, job creation, and wage increases contribute to this growth.
However, the US economy is expected to slow down significantly, potentially below 1% in Q4 and may stall next year. This is due to the impact of the Federal Reserve's large interest rate hikes last year. The housing market is particularly affected, with 30-year mortgage rates at a 23-year high of over 7%, leading to low home sales and affordability issues. Bank lending standards are tightening. Services could be affected as households cut back on non-essential purchases and many have depleted their pandemic savings. Additionally, many student loan borrowers have resumed repayments after a 3.5-year break, adding to consumer financial pressures.
The current economic slowdown aligns with the Federal Reserve's aim to control inflation. However, rising oil prices have paused the steady decrease in inflation, which had fallen from a peak of 9.1% in summer 2022 to 3.0% in June, then rose to 3.7% in August. On the bright side, core inflation, excluding food and energy, has remained stable at near two-year lows of 4.3%, down from 6.6% last fall. This is due to smoother global supply chains and slower wage growth. But services inflation remains high, suggesting a return to the Fed's 2% target won't likely happen until early 2025.
The theme of "higher for longer" has pushed 10-year Treasury yields up by 130 basis points over the past five months, reaching a 16-year high of 4.8%. It's expected that yields will drop to 4.25% by year-end and further to 3.75% in late 2024, but this will likely need US data to show a downturn, a looser labour market, and lower inflation to convince investors.
The quick reversal of the US Treasury yield curve is significant. This change could lead to imminent recession warnings. If the unemployment rate increases even slightly, it could trigger recession alarms.
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