Fed Success! High LT Rates & Recession Coming
- World yield curve inversion is falling because of rising LT rates
- Rising LT rates are reducing yield curve inversion fastest in DM Americas and DM Europe
- Rates are high across EMs, crushing in FMs, and low in EM Asia
- France and Germany ST rates rising; DM countries have past peak yield curve inversion due to rising LT rates
- Rates are low in China, which, together with India, never inverted
Rates returning to normal?
Irving Fisher (1867 –1947) – One of the earliest American neoclassical economists
- Described as "the greatest economist the United States has ever produced"
- His reputation during his lifetime was irreparably harmed by his public statement, just nine days before the Wall Street Crash of 1929, that the stock market had reached "a permanently high plateau"
- His 1930 treatise, The Theory of Interest, summed up a lifetime's research into capital, capital budgeting, credit markets, and the factors (including inflation) that determine interest rates
- Some core concepts
- Time Preference – The idea that people generally prefer to have goods and services sooner rather than later
- Real Interest Rate – The real interest rate adjusts for the effects of inflation, allowing for a more accurate evaluation of the purchasing power of money over time
- Fisher Equation – Relates nominal interest rates to real interest rates and inflation
- Expressed as: Nominal Interest Rate = Real Interest Rate + Inflation Rate
- The Fisher Effect - Suggests that nominal interest rates adjust in response to expected changes in inflation
- In other words, if people anticipate higher inflation, nominal interest rates will rise to compensate
Jeremy Siegel (born 1945) Professor of finance at the Wharton School of the University of Penn.
- Comments extensively on the economy and financial markets
- Wrote two books, but most prominent is
- Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies
History of the real return on long-term US government bonds
Global Markets
World yield curve inversion is falling because of rising LT rates
Interest rate level – 5.4% world 3m yield, 10yr 4.4%; LT rates much higher in EM
- World 3m rates were 5.4% in Sept., DM rates were 4.4%, and EM rates were 6.9%, a 2.6ppt premium
- World 1yr rates were 5.1% in Sept., DM rates were 4.3%, and EM rates were 6.2%, a 1.9ppt premium
- World 10yr rates were 4.7% in Sept., DM rates were 3.8%, and EM rates were 5.9%, a 2ppt premium
Year-on-year changes – DM 3m yield rose from lower base; fast DM LT rate rise
- 3m yield had a large 2.2ppt YoY rise to 4.4% in DM; there was a smaller 1.4ppt rise in EM
- 1yr rates only increased 0.7ppts YoY in EM; but were up a large 1.4ppt YoY in DM
- 10yr EM rates up only 0.2ppts YoY, DM rates rose by a much higher 0.7ppts
Rate progression – DM tightening has stopped but continues in EM
- 3m rates were flat MoM in DM and are on the rise in EM
- A 0.5ppt MoM rise in EM 1yr yield is raising World yields; DM yield was flat
- Sept 10yr yield rose in both DM and EM, up about 0.4ppts MoM
Yield curve – Rising LT rates pushed world past August peak inversion
- August looks to have been World peak inversion as LT yields have been rising
- World 3m rates rose fast, but now LT rates have started to rise
- May looks to have been DM peak inversion as LT yields start to...
