Stubborn inflation raises hawkish Fed duo risk of recession commoditycontinues to hit the stock and bond markets. The S&P 500 failed to hold the critical support of 3,900, dropping to its lowest level since June.
Fed futures point out that the policy rate will rise to 4.4 percent with slowing steps after the increase of 2 x 75 basis points in September and November meetings. Famous fund manager Ray Dalio predicts that if the Fed raises the policy rate to 4.5 percent, US stocks will fall by another 20 percent.
The two-year U.S. bond is 3.87 percent, close to its highest level since 2007. 2-30 years near peak after 2000 interest The difference signals a clear recession. Copper, wheat, iron-steel and oil markets, which declined by 20-40 percent compared to their peak, are also producing similar signals.
Is a Global Recession Coming? The distinguished economists of the World Bank, Guenette, Kose, Sugawara, (Is a Global Recession Imminent? — EFI Policy Note 4) compare the current situation with the global recessions of 1975, 1982, 1991, 2009, 2020. They emphasize that the risk of global recession is increasing, but not inevitable.
It is not correct to leave the market pricing and make an ambitious prediction such as “global recession is at hand”. However, there are two main risks that may lead us to go in this direction: (i) The power struggle between the USA and Russia could plunge the European economy into recession. (ii) Stubborn inflation may force the Fed to hawk at the expense of pushing the US into recession.
The realization of the first risk hits the outward balancing act of the Turkish economy. The balance of payments, which was damaged by the deterioration in the terms of trade in 2022, will be hit this time by the weakening of our main market.
The realization of the second risk causes the dollar to continue to strengthen, and it affects developing countries in general, such as Turkey in particular. dollar hits countries with high debt.
Are these risks priced in by the markets? It depends on which market you’re looking at. MSCI is pricing the risk of recession to a great extent with the heavy losses they have experienced since the beginning of the year in Germany (-35 percent), Developing Countries (- 25 percent), and the USA (- 20 percent). On the other hand, MSCI Turkey does not price the risk of recession with a return of 24 percent since the beginning of the year.