International Communique No. 340 – 31st of May 2022


Recently bond markets in particular perked up as long-dated yields (10 years) ebbed by 14 and 7 basis points (bp) in the US and Germany, respectively. A similar downward move was also observed on short-term yields (2 years) in the US (-16bp) and Germany (-6bp). Prospective tightening by the Fed in the coming months, consisting of higher policy rates and a withdrawal of quantitative easing, is stoking fears of a recession in the US within the next 12 months, with some sectors suffering more than others. This is what is causing yields to ease all along the Treasuries curve.

The prospect of monetary tightening is already being felt in the residential property sector. The 30-year mortgage rate has risen year to date from 3.27% to 5.29% – more than 2 percentage points and much faster than the mere 1-point increase in the equivalent-maturity Treasury yield. This surge in funding costs, combined with steadily rising property prices up to all-time records in some cases, is discouraging a growing number of potential borrowers. Sales of existing homes have been dropping in recent months.

Despite the slowdown in residential transactions and the negative wealth effect arising from sharp declines in bond, equity and crypto markets since January, the US economy generally remains in good shape. This is particularly the case for household consumption, which is benefiting from strong job creation, sturdy wage increases (thanks to an unprecedented labour shortage) and the continued release of substantial savings thanks to Biden’s stimulus cheques. Consequently, while US economic growth is likely to slow sharply over the next few quarters and may even tip into stagnation in real terms for a time, a recession seems too pessimistic a forecast at this juncture.

Considering that equity and bond markets have been positively correlated for several months, the rebound in bonds also allowed stocks to have a decent week and put an end to their seven weeks on the slide (representing their worst run since 2001). The S&P 500 is up 6.6% while the Stoxx index has bounced back by 3%.

The euro benefited recently from calmer conditions in the Fed Funds futures market as well as building expectations for a ECB rate hike, and gained 1.6% against the dollar, though it failed to advance against the Swiss franc.

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