OPINION
Market Rating Before FOMC MeetingJan 31
Stagflation Can Be Avoided
Especially the war in Ukraine and the supply bottlenecks due to the uncertainty of the coronavirus closures in China, which has adopted a zero-case strategy, have a great impact here. Central banks of developed countries have started a monetary tightening cycle, especially to control the domestic demand channel and thus inflation.
However, there is a new source of anxiety in the markets as the central banks of emerging countries followed the monetary tightening started by the US Federal Reserve (FED), which is in a position to dictate global monetary policies, by increasing the rate of interest rate hikes: Stagflation!
While inflationary pressures had reached a dramatic level in the shadow of the war, they started to be expressed more loudly in markets where stagflation risks for developed countries increased due to the slowdown in economic activities due to the rapid rise in financing costs.
This issue was supported by the fact that the US economy's economic recession, which was negative 1.6 percent in the first quarter of the year, shrank by 0.9 quarter-on-quarter despite the market's expectation of a 0.5 percent increase in the quarter. On the other hand, the increase in non-farm employment (NFP) by 528 thousand people in July, which was announced on Friday, complicated market expectations.
At this point, we consider that the US yield curves should be followed as an important indicator of the pricing behavior in the markets. When we examine the pricing that has occurred since the pandemic; The 2- to 10-year yield curves have reached a 20-year low at minus 0.45 percent. On the other hand, long-term yield curves of 5 to 30 years show a horizontal outlook of around 0.080%.
In other words, the global bond market has almost realized its pricing in which the US economy entered a recession in the short term. However, the prediction that price pressures will ease with the recession is also a sign of a decline in inflation expectations. The long-term yield curve indicates that the FED has brought inflation expectations under control.
This signals that the pressure of bond rates on international assets may weaken, which shows that permanent inflation is not taken into consideration with the economic recession, therefore stagflation can be avoided.
