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Huge selloff rocks Treasury markets, yield curve inverts

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© Reuters. FILE PHOTO: U.S. One dollar banknotes are seen in front of displayed stock graph in this illustration taken, February 8, 2021. REUTERS/Dado Ruvic/Illustration/File Photo

By Yoruk Bahceli and Sujata Rao

(Reuters) – U.S. two-year Treasury yields rose above 10-year borrowing costs on Monday — the so-called curve inversion that often heralds economic recession — on expectations interest rates may rise faster and further than anticipated.

Fears that the U.S. Federal Reserve could opt for an even larger rate hike than anticipated this week to contain inflation sent two-year yields to their highest levels since 2007.

At the same time, a view that aggressive rate hikes could raise recession risks was playing out.

The gap between two and 10-year Treasury yields fell to as low as minus 2 basis points on Monday, Tradeweb prices showed. The curve had inverted two months ago for the first time since 2019 before normalising.

An inversion of this part of the yield curve is viewed by many as a reliable signal that recession could come in the next year or two.

The move follows inversions on Friday in the three-year/10-year and five-year/30-year portions of the Treasury curve, after data showed inflation continued to accelerate in May.

Two-year Treasury yields rose to a 15-year high around 3.25%, while 10-year yields touched the same level, the highest since 2018.

Friday’s data showed the largest annual U.S. inflation increase in nearly 40-1/2 years, dashing hopes the Federal Reserve could pause its interest rate hike campaign in September. Many reckon the central bank may actually need to up the pace of tightening.

Barclays (LON:BARC) analysts said in fact they now expected a 75 bps move from the Fed on Wednesday rather than the 50 bps which has been baked in.

Futures also now see a 20% chance of a 75 bps move next week and if implemented, that would be the biggest single-meeting hike since 1994.

UBS strategist Rohan Khanna said hawkish ECB communication alongside the inflation print “have completely shattered this idea that the Fed may not deliver 75 bps or that other central banks will move in a gradual pace”.

“The whole idea went out the drain…”that’s when you get turbo-charged flattening of yield curves. It is just a realisation that peak inflation in the U.S. is not behind us, and unless we are told so, maybe peak hawkishness from the Fed is also not behind us,” Khanna added.

Money markets are also upping their bets on the U.S. terminal rate — where the Fed funds rate may peak this cycle. On Monday, they priced rates to approach 4% in mid-2023, up 50 basis points in a week’s time.

Deutsche Bank (ETR:DBKGn) said they now saw rates peaking at 4.125% in mid-2023.

The bond market selloff has set other markets on edge, sending German 10-year yields to the highest since 2014 and knocking S&P 500 futures 2.5% lower.

Economy

South Korean exports dropped 14% in November, the highest in 2.5 years

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exports South Korea

South Korea’s exports fell 14 percent year-on-year to $51.91 billion in November, preliminary data from the Ministry of Commerce, Industry and Energy showed. The November drop was the biggest in 2.5 years since May 2020 and was caused both by the deteriorating global economy, which even a Google price chart showed, and a truckers’ strike in the country.

South Korea exports 2022 – reasons for the drop

Exports fell for the second month in a row. Analysts on average expected an 11% decline, according to Trading Economics. Respondents to MarketWatch predicted a 10.5% decline.

Shipments of semiconductor products overseas, the country’s top export item, fell 29.8%; petrochemicals fell 26.5% and steel exports fell 10.6%. Meanwhile, exports of automobiles jumped 31% and petroleum products 26%.

Exports to China, South Korea’s largest trading partner, fell by 25.5%, and to Asian countries – by 13.9%. Below, supplies to the USA grew by 8% and to the European Union – by 0.1%.

In January-November exports rose by 7.8% on the same period last year and reached a record $629.1 billion.

South Korean imports rose 2.7% to $59.2 billion in November, marking the 23rd consecutive month of gains, but the current rate of growth is the lowest since November 2020. Experts had predicted an increase of only 0.2%.

South Korea’s trade deficit last month was $7.01 billion, compared with a surplus of $2,973 billion a year earlier.

The negative balance was recorded for the eighth month in a row. As a result, by the end of 2022, the country may record a foreign trade deficit for the first time since the financial crisis in 2008.

Earlier we reported that the UN estimates the cost of humanitarian aid in 2023 at a record $51 billion.

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The UN estimates humanitarian aid costs in 2023 at a record $51 billion because of an impending humanitarian crisis

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a humanitarian crisis

Joint humanitarian operations will require a record $51.5 billion in 2023 to address urgent problems.

The UN Office for the OCHA estimates that 339 million people will need urgent aid in 2023. At the same time, OCHA called on donor countries to provide funds for assistance in 2023 to the 230 million people most in need, living in 68 countries.

Griffiths explained that aid is needed not only for people experiencing conflicts and disease outbreaks. but also for those suffering the effects of climate change, such as people in peninsular Somalia facing drought and those in Pakistan experiencing severe flooding. For the first time, the growing humanitarian crisis has brought the number of displaced people worldwide to the 100 million mark. Also worsening an already bad situation is the worldwide coronavirus pandemic, which affects the poor. Note that the general economic crisis has begun to negatively affect even the Netflix price chart.

Earlier we reported that house prices in the UK fell by 1.4% in November.

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Economy

Average house prices in the UK fell 1.4% in November

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average house prices in the uk

Average house prices in the UK fell 1.4% in the previous month in November to 263,788 thousand pounds (about $319,000), according to the British mortgage company Nationwide Building Society.

The decline was recorded at the end of the second consecutive month and was the most significant in almost 2.5 years – since June 2020. Analysts on average had forecast a decline of only 0.3%, according to Trading Economics.

Are house prices in the UK going to fall even more?

Residential real estate prices in November compared to the same month last year increased by 4.4%. At the same time, experts expected a larger increase of 5.8%. The growth rate slowed down significantly compared with 7.2% in October. Because of the difficult economic situation, British investors are investing in other instruments. The Microsoft price chart, for example, is showing potential for growth, so many are interested in the U.S. stock market. 

“The market looks set to remain under pressure in the coming quarters. Inflation will remain high for some time, and interest rates are likely to continue to rise,” believes Nationwide Senior Economist Robert Gardner. – The outlook is unclear, and much will depend on how the overall economy behaves, but a relatively soft landing is still possible.”

Earlier we reported that Sanctions Circumvention was included in the EU’s list of criminal offenses.

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