OPINION
Market Rating Before FOMC MeetingJan 31
Inflation Expectations, Russo-Ukraine Conflict and Gold Price
Inflation and inflation expectations are the biggest shock experienced by the global economy while exiting from the policies adjusted for pandemic period. The global economy is experiencing the highest inflation in 20 years due to the effects of the policies implemented by the authorities of developed and developing countries during the pandemic period, supply bottlenecks and high commodity prices.
According to Organization for Economic Co-operation and Development (OECD), average inflation of member countries was 4.0 percent at the end of 2021, the highest level since 2000. In the USA, the world's largest economy, inflation reached the peak of 40 years with 7.5 percent as of January 2022 and Eurozone inflation hit 5.1 percent, the highest level of the last 30 years.
Speaking of pandemic, we see that vaccination campaigns are going well. According to Our World in Data, 61.9 percent of the World population received at least one dose. In total, 10.42 billion doses have been given as of today and daily average is 30.92 million.
Although it is clear that the downward effect of the pandemic on the economies has decreased, many countries have not yet returned to the activity level before coronavirus has begun. This causes monetary authorities to implement different policies.
The US Federal Reserve (Fed), which has the world's strongest reserve currency, indicated that it would start interest rate hikes in March, stating that the economy does not need more monetary support. However, it is not known whether this hake will be 25 or 50 bps and whether Fed will increase rates after each meeting.
On the other side, Bank of England increased rates by 15 and 25 bps in December and February meetings. Current policy rate is 0.50 percent and BoE started discussions regarding the balance sheet reduction.
European Central Bank and Bank of Japan implied that they will be the last developed country central banks exiting from the policies adjusted for pandemic period.
Under normal circumstances, these mean strong pressure on safe-haven assets; however, gold tested the highest level of the last 8 months, 1879 level. And US 10 year treasuries are around 2.0 percent and developing markets are in a mixed course.
There are two significant factors related to the mixed outlook in asset pricing: inflation expectations and geopolitical risks.
Due to the wave of sales in the global treasuries market, the US 10 year treasury yields rose to 2.05 percent, the highest level since August 2019. While the 10-year German treasury yields reach 0.30 percent after exceeding zero and setting a new record, UK 10 year Gilt is located above 1.60 percent after almost 4 years. These figures reveal that the inflation expectations in the markets are in a strong upward trend.
On the other hand, the Russia-Ukraine conflict has recently risen to the top of the scale of the markets. While Russia continues to increase its military presence in various borders of Ukraine, western countries, especially the USA, are threatening Russia with harsh sanctions. In an environment where international political tension is rapidly escalating, a possible invasion poses a risk for the global economy, which has not yet fully recovered from the effects of the pandemic.
Another issue is oil prices. Military drills of the leader of non-OPEC oil exporting countries led to rally in oil prices, creating potential supply concerns. Crude oil, which started its rise in December, strengthened with the tensions in the Russia-Ukraine line, and reached 94.00, the peak of 8 years, yesterday.
The fact that crude oil causes an increase in energy commodities, especially Brent and natural gas in international markets, means that the already high inflationary expectations will increase further through transportation costs.
To sum up, the tightening stance of the central banks under the leadership of North America and England is a factor that will feed bond rates and put pressure on gold, yet war concerns are likely to put the global economic recovery at risk. Currently, although Russia is trying to prevent various scenarios by frequently expressing that it is open to communication, it increases its military activities on the Ukrainian border.
Central banks are defending relatively different approaches and geopolitical risks may continue to play an active role in gold prices, if the Federal Reserve, which is the leader of global monetary policies, does not draw a strong hawkish image against inflationary indicators at its March meeting.
According to Organization for Economic Co-operation and Development (OECD), average inflation of member countries was 4.0 percent at the end of 2021, the highest level since 2000. In the USA, the world's largest economy, inflation reached the peak of 40 years with 7.5 percent as of January 2022 and Eurozone inflation hit 5.1 percent, the highest level of the last 30 years.
Speaking of pandemic, we see that vaccination campaigns are going well. According to Our World in Data, 61.9 percent of the World population received at least one dose. In total, 10.42 billion doses have been given as of today and daily average is 30.92 million.
Although it is clear that the downward effect of the pandemic on the economies has decreased, many countries have not yet returned to the activity level before coronavirus has begun. This causes monetary authorities to implement different policies.
The US Federal Reserve (Fed), which has the world's strongest reserve currency, indicated that it would start interest rate hikes in March, stating that the economy does not need more monetary support. However, it is not known whether this hake will be 25 or 50 bps and whether Fed will increase rates after each meeting.
On the other side, Bank of England increased rates by 15 and 25 bps in December and February meetings. Current policy rate is 0.50 percent and BoE started discussions regarding the balance sheet reduction.
European Central Bank and Bank of Japan implied that they will be the last developed country central banks exiting from the policies adjusted for pandemic period.
Under normal circumstances, these mean strong pressure on safe-haven assets; however, gold tested the highest level of the last 8 months, 1879 level. And US 10 year treasuries are around 2.0 percent and developing markets are in a mixed course.
There are two significant factors related to the mixed outlook in asset pricing: inflation expectations and geopolitical risks.
Due to the wave of sales in the global treasuries market, the US 10 year treasury yields rose to 2.05 percent, the highest level since August 2019. While the 10-year German treasury yields reach 0.30 percent after exceeding zero and setting a new record, UK 10 year Gilt is located above 1.60 percent after almost 4 years. These figures reveal that the inflation expectations in the markets are in a strong upward trend.
On the other hand, the Russia-Ukraine conflict has recently risen to the top of the scale of the markets. While Russia continues to increase its military presence in various borders of Ukraine, western countries, especially the USA, are threatening Russia with harsh sanctions. In an environment where international political tension is rapidly escalating, a possible invasion poses a risk for the global economy, which has not yet fully recovered from the effects of the pandemic.
Another issue is oil prices. Military drills of the leader of non-OPEC oil exporting countries led to rally in oil prices, creating potential supply concerns. Crude oil, which started its rise in December, strengthened with the tensions in the Russia-Ukraine line, and reached 94.00, the peak of 8 years, yesterday.
The fact that crude oil causes an increase in energy commodities, especially Brent and natural gas in international markets, means that the already high inflationary expectations will increase further through transportation costs.
To sum up, the tightening stance of the central banks under the leadership of North America and England is a factor that will feed bond rates and put pressure on gold, yet war concerns are likely to put the global economic recovery at risk. Currently, although Russia is trying to prevent various scenarios by frequently expressing that it is open to communication, it increases its military activities on the Ukrainian border.
Central banks are defending relatively different approaches and geopolitical risks may continue to play an active role in gold prices, if the Federal Reserve, which is the leader of global monetary policies, does not draw a strong hawkish image against inflationary indicators at its March meeting.
