Inflation and the bond market

US Treasuries rose on Tuesday, in the opening session of 2023, amid the ongoing rally. Recession risks and the perception of peak inflation also increased the attractiveness of bonds. The indicator UST 2Y closed 4.35% lower, while the most watched UST 10Y closed 3.71%. Data releases followed, including final December S&P Global production, which eased as originally anticipated, and the unexpected recovery in the construction spending report. Today, December ISM manufacturing data will be monitored.

In terms of the broader picture, attention will turn to Fed minutes and December nonfarm payrolls data. Although Fed members’ interest rate forecasts rose at the last meeting, the prediction that rate cuts would begin in 2024 was prominent. However, there is a detail that should be kept in mind: Rate projections reveal that interest rates will remain at the level of tight monetary policy in the period including 2025. The threshold level of this policy will of course depend on the severity of recession fears. The Fed still cites the high trend of inflation in its tight monetary policy.

The employment data, which will be announced on Friday, may guide the real interest rate movement in the short term. It is likely that speculation on terminal interest rates will be based on the inflation pressure created by wages, so we still consider it as a guiding indicator. It is likely that the Fed will put on hold by raising interest rates in two more meetings, but will keep interest rates at the maximum level throughout the year.

It is a comforting detail that the energy use decreased with the mild season in Europe and the return of prices to pre-war levels. If the regional economies, especially Germany, are going to have a better year than expected, the possibility of the ECB to focus on inflation increases. It is important to shift the balance between supply inflation and demand inflation. Because before that, gasoline prices were dominated by a managed supply inflation. Inflation stemming from wages and expectations is under the direct control of policy instruments. The current situation may enable the ECB to be more proactive in raising interest rates.

In Asia; Although the BOJ still talks about the need for loose monetary policy, the elimination of the yield ceiling justifies the market to expect a change in monetary policy.

If we look at Turkish assets; The latest data show inflation slowed last month at its fastest pace in more than a quarter of a century. The data showed that consumer prices rose 64.3% year-on-year in December, down from 84.4% the previous month. However, the slowdown is due to the statistical impact of the higher base a year ago. Despite the sharp decline in the annual inflation rate, price increases continue to be broad-based. The public expenditures planned before the election, the borrowing rates that encourage individuals to spend, and the wage hikes cause there to be no other factor other than the base effect in the inflation movement at the moment.

Kaynak Enver Erkan / Tera Yatırım
Hibya Haber Ajansı