United States – In yesterday’s session, global financial markets seemed far from reacting to a research note issued by Morgan Stanley, which stated that its estimates indicate that the US Federal Reserve will begin reducing interest rates as of next September.
This coldness from the financial markets towards the research note is due to the state of pessimism prevailing among traders and investors, that the interest rate cut will not take place before the end of 2024.
Since mid-April, global financial markets have been shocked, which prompted a segment of investors to migrate away from stocks to US bonds.
The Fed had expected to cut interest rates in June 2024, then postponed the decision to September, due to the emergence of signs of rising inflation in American markets.
Currently, the Federal Reserve indicates that the interest rate reduction journey may begin at the end of 2024, meaning that interest rates, which currently stand at 5.5 percent, the highest in 23 years, will remain stable for months to come.
Because the dollar is a global payments currency, accounting for 80 percent of trade payments, 90 percent of debt issuance, and 56 percent of the International Monetary Fund’s reserves, global markets are affected by the path of US interest rates and US inflation data.
** The genie of inflation
The longer high inflation in the United States, at 3.5 percent last March compared to the 2 percent target, persists, the greater the likelihood of lasting changes in the decisions of households and businesses.
In the US market, the biggest driver of high inflation to date in 2024 is housing and rents for homeowners, which rose at an annual rate of 6.1 percent in the first three months of this year.
Under normal circumstances, the relationship between inflation and stock markets is inverse, because high inflation prompts the US Federal Reserve to raise interest rates on the dollar, with the aim of curbing consumption.
Faced with this situation, investments move from stock markets to funds denominated in US dollars, which then offer higher returns due to rising interest rates.
These fears of a return of inflation were not floating on the surface of the global and American economy in the first quarter, as expectations indicated an imminent cut in interest rates, which pushed Wall Street to rise.
As for the first quarter, the S&P index closed up by about 10.2 percent, which is the strongest first quarter for the index in five years. The Dow Jones index also rose by 5.6 percent, recording the strongest performance for the first quarter since 2021, while the Nasdaq index gained about 9.11 percent.
** Escape to Bonds
With the Federal Reserve in no rush to lower interest rates, Bloomberg indicates that an influx of investors is taking place into fixed-income assets, “American bonds,” in a major reset for Wall Street.
Last year, investors earned nearly $900 billion in annual interest on US government debt (bonds), which is double the average over the previous decade, and the reason is high interest rates.
According to Bloomberg, this number is expected to rise as all Treasury bonds currently carry yields of 4 percent or more.
Bonds turn into a refuge for investors, because they believe that maintaining high interest rates will harm the stock market, and thus they guarantee at least 4 percent returns on their investments in American bonds, by transferring their money from stocks to those bonds.
All of the above is due to the fact that inflation is still far from its target of 2 percent, while there is another reason related to the continued pace of growth of the American economy, which means more production and employment, more liquidity in the hands of individuals and companies, and more consumption.
On Wednesday of last week, Federal Reserve Chairman Jerome Powell stressed, in a press conference, a wait-and-see approach to inflation data in the coming months.
Last February, the Congressional Budget Office expected that interest and dividends on bonds paid to individuals would rise to $327 billion this year, more than double the amount in the mid-2000s.
Last March alone, the Treasury paid about $89 billion in interest to bondholders, or roughly $2 million per minute.
Anatolia
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2024-05-10 23:18:18