ISMS 33: Fed Success! High LT Rates & Recession Coming

Fed Success! High LT Rates & Recession ComingWorld yield curve inversion is falling because of rising LT ratesRising LT rates are reducing yield curve inversion fastest in DM Americas and DM EuropeRates are high across EMs, crushing in FMs, and low in EM AsiaFrance and Germany ST rates rising; DM countries have past peak yield curve inversion due to rising LT ratesRates are low in China, which, together with India, never invertedRates returning to normal?Irving Fisher (1867 –1947) – One of the earliest American neoclassical economistsDescribed 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 ratesSome core conceptsTime Preference – The idea that people generally prefer to have goods and services sooner rather than laterReal 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 timeFisher Equation – Relates nominal interest rates to real interest rates and inflationExpressed as: Nominal Interest Rate = Real Interest Rate + Inflation RateThe Fisher Effect - Suggests that nominal interest rates adjust in response to expected changes in inflationIn other words, if people anticipate higher inflation, nominal interest rates will rise to compensateJeremy Siegel (born 1945) Professor of finance at the Wharton School of the University of Penn.Comments extensively on the economy and financial marketsWrote two books, but most prominent isStocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment StrategiesHistory of the real return on long-term US government bondsGlobal MarketsWorld yield curve inversion is falling because of rising LT ratesInterest rate level – 5.4% world 3m yield, 10yr 4.4%; LT rates much higher in EMWorld 3m rates were 5.4% in Sept., DM rates were 4.4%, and EM rates were 6.9%, a 2.6ppt premiumWorld 1yr rates were 5.1% in Sept., DM rates were 4.3%, and EM rates were 6.2%, a 1.9ppt premiumWorld 10yr rates were 4.7% in Sept., DM rates were 3.8%, and EM rates were 5.9%, a 2ppt premiumYear-on-year changes – DM 3m yield rose from lower base; fast DM LT rate rise3m yield had a large 2.2ppt YoY rise to 4.4% in DM; there was a smaller 1.4ppt rise in EM1yr rates only increased 0.7ppts YoY in EM; but were up a large 1.4ppt YoY in DM10yr EM rates up only 0.2ppts YoY, DM rates rose by a much higher 0.7pptsRate progression – DM tightening has stopped but continues in EM3m rates were flat MoM in DM and are on the rise in EMA 0.5ppt MoM rise in EM 1yr yield is raising World yields; DM yield was flatSept 10yr yield rose in both DM and EM, up about 0.4ppts MoMYield curve – Rising LT rates pushed world past August peak inversionAugust looks to have been World peak inversion as LT yields have been risingWorld 3m rates rose fast, but now LT rates have started to riseMay looks to have been DM peak inversion as LT yields start to rise3m DM rates have flattened, but LT rates have been rising, reducing yield curve inversionAugust looks to have been EM peak inversion as LT yields have been risingAfter a year of significant rises in EM ST rates, LT rates have started rising, reducing inversionKey points and the bottom line5.4% world 3m yield, 10yr 4.4%; LT rates much higher in EMDM 3m yield rose from lower base; fast DM LT rate riseDM tightening has stopped but continues in EMRising LT rates pushed world past August peak inversionWorld yield curve inversion is falling because of rising LT ratesDeveloped Market RegionsRising LT rates are reducing yield curve inversion fastest in DM Americas and DM EuropeInterest rate level – High DM Americas rates, EM Europe lower, and DM Pacific much lowerDM Americas 3m rates were 5.4% in Sept, DM Europe rates were 4.0%, DM Pacific rates were 1.4%DM Americas 1yr rates were 5.5% in Sept, DM Europe rates were 3.7%, DM Pacific rates were 1.6%DM Americas 10yr rates were 4.5% in Sept, DM Europe rates were 3.6%, DM Pacific rates were 2.1%Year-on-year changes – ST rates rising in DM Europe, LT rates rising in DM Americas2.8ppts YoY 3m rate rise in DM Europe, to 4%; up only 0.5ppt to a low 1.4% in DM PacificDM Americas and Europe had a high 1.5ppt rise in 1yr rate; 0.5ppt in DM Pacific to a low 1.6%DM Americas had the highest rise in 10yr yields, up 0.8ppts, but other regions are rising as wellRate progression – Rates hardly moved MoM across all DM regionsDM Europe central bank tightening drove fast 3m rate YoY rise; rates flat MoM in all DM regions1yr rate barely moved MoM in all DM regions10yr yield rising fastest MoM in DM Americas and Europe, slow MoM rise in DM PacificYield curve – Rising LT rates in DM Americas and Europe flattening yield curve; normal in DM PacificDM Americas inversion peaked in May 2023; LT rate rise reduced inversion by 0.5ppts MoMDM Europe yield curve inversion peaked a bit later, in August, and fell MoM due to LT rate riseDM Pacific yield curve never inverted as it never went through a US Fed-style hiking cycleKey points and the bottom lineHigh DM Americas rates, EM Europe lower, and DM Pacific much lowerST rates rising in DM Europe, LT rates rising in DM AmericasRates hardly moved MoM across all DM regionsRising LT rates in DM Americas and Europe flattening yield curve; normal in DM PacificRising LT rates are reducing yield curve inversion fastest in DM Americas and DM EuropeEmerging Market RegionsRates are high across EMs, crushing in FMs, and low in EM AsiaInterest rate level – ST EM rates high, ranging from 12% to 35%, but a low 3.2% in EM AsiaEM Americas 3m rates were 11.9% in Sept, EM Asia rates were 3.2%, EM Europe rates were 11.6%, EM ME&A rates were 15.7%, Frontier rates were 33.5%EM Americas 1yr rates were 11.3% in Sept, EM Asia rates were 3.1%, EM Europe rates were 15.2%, EM ME&A rates were 25.2%, Frontier rates were 16%EM Americas 10yr rates were 11% in Sept, EM Asia rates were 3.6%, EM Europe rates were 12.5%, EM ME&A rates were 17.5%, Frontier rates were 11%Year-on-year changes – ST rates in FM and EM ME&A are up, LT rates are rising fast in EM EuropeBiggest YoY rise of 3m yields in Frontier markets, up 10.6ppt, and EM ME&A up 4.6ppt1yr yield rose most YoY in EM ME&A, up 7.4ppt and EM Europe up 5.2ppt10yr yields flat YoY in EM Americas; 3.2ppt rise in EM Europe and 2.9ppt rise in EM ME&ARate progression – FM ST rates up massively, but flat MoM, LT rates rising in EM Europe3m rates up MoM in EM Europe; down in super high FMs and high EM Americas; flat in EM Asia1yr yields show significant rise in EM Europe; High in EM ME&A; Low in EM AsiaLT rates are up across EMs, rising particularly fast MoM in EM Europe, low and flat in EM AsiaYield curve – Inversion massive in FM, falling in EM Americas; normal in EM Asia, Europe, and EM ME&AEM Americas yield curve inverted slightly more than World; but peaked in June 2023EM ME&A yield curve never inverted as ST rates have always been highFrontier yield curve inversion peaked in August 2023, but crushing ST rates remainKey points and the bottom lineST EM rates high, ranging from 12% to 35%, but a low 3.2% in EM AsiaST rates in FM and EM ME&A are up, LT rates are rising fast in EM EuropeFM ST rates up massively, but flat MoM, LT rates rising in EM EuropeInversion massive in FM, falling in EM Americas; normal in EM Asia, Europe, and EM ME&ARates are high across EMs, crushing in FMs, and low in EM AsiaDeveloped CountriesFrance and Germany ST rates rising; DM countries have past peak yield curve inversion due to rising LT ratesInterest rate level – US/UK have 5.5% ST and 4.6% LT rates, Germany and France lower at 3.6%US 3m rates were 5.5% in Sept, Japanese rates were 0.2%, German rates were 3.6%, UK rates were 5.4%, French rates were 3.8%US 1yr rates were 5.5% in Sept, Japanese rates were zero, German rates were 3.7%, UK rates were 5.1%,...