U.S. Fed - No Pivot For You!

03 August 2022

Read Time 2 MIN

 

Global Rates Selloff

Yesterday’s selloff in U.S. rates – which continued this morning - was a reminder that the market should pay more attention to the Federal Reserve’s (the Fed) message rather than its own narratives/thought constructs. A barrage of hawkish statements from the Fed – which clearly prioritized fighting high inflation - added several basis points to the expectations for the Fed’s rate hike in September (now at 62bps), but, curiously, the market refuses to see more hikes beyond December (see chart below). Growth “fatigue” and a greater risk of recession is a major reason. The 2023 consensus forecast for the U.S. has been cut to 1.3%, and today’s extremely weak retail sales in the Eurozone signal that the investment community might be underestimating growth headwinds in other independent global growth drivers. Emerging markets (EM) are also affected by these concerns. Manufacturing activity surveys for July pointed to a possibility of an H2 growth “cliff” in more than one country, and a sharp slowdown in retail sales in Hungary and Romania signaled that high inflation started to affect consumer sentiment.

Global Energy Prices and Inflation

Going back to inflation pressures, cooling domestic demand can make central banks’ job easier a few months from now, but supply-side and non-core price pressures can keep inflation expectations unanchored and above the target. This especially applies to fuel and energy prices, which account for a much larger share of consumer price baskets in EM than in advanced economies. This explains why today’s OPEC+ (the Organization of the Petroleum Exporting Countries and allies) proposal for a small increase in September’s crude oil output was met with a whiff of disappointment. 

China U.S. Treasury Holdings And Geopolitics

Today’s final point on global rates – that we discussed yesterday with colleagues – relates to geopolitics. U.S. House Speaker Pelosi’s visit to Taiwan Region went smoothly, but an uptick in geopolitical noise in the run up to the trip raised some concerns about China’s potential retaliatory moves, including its future “appetite” for U.S. Treasuries (UST). Of course, we are not talking about the full stop scenario. However, China is a big UST holder – albeit the volume declined after peaking in 2013-2015. What will happen to yields if China buys even less USTs going forward? Stay tuned! 

 

Chart at a Glance: U.S. Policy Rate Expectations – Limited Space for Hikes

US-Emerging-Markets-Daily-2022-08-03.png

Source: Bloomberg LP

IMPORTANT DEFINITIONS & DISCLOSURES  

This material may only be used outside of the United States.

This is not an offer to buy or sell, or a recommendation of any offer to buy or sell any of the securities mentioned herein. Fund holdings will vary. For a complete list of holdings in VanEck Mutual Funds and VanEck Vectors ETFs, please visit our website at www.vaneck.com.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Van Eck Associates Corporation or its subsidiaries to participate in any transactions in any companies mentioned herein. This content is published in the United States. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed herein.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.