‘Centers put the brakes on’ expectations are getting stronger

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After a long hiatus, inflation data in the world’s largest economies did not come as an upside surprise, with the fall in commodity prices and the slowdown in demand in July. While consumer inflation in China, Germany and Spain increased in line with the expectations in July, the CPI in the USA was also below expectations, increasing the risk appetite in global markets. In July, CPI rose to 2.7 percent in China, while it remained at 8.5 percent in Germany. In Italy, it decreased to 8.4 percent. A surprise fall was recorded in producer inflation in China, and the PPI fell from 6.1 percent to 4.2 percent in July.

Downside surprise in US CPI: 75 bps probability drops to 32%

While the US CPI was expected to increase by 0.2 percent in July, it remained unchanged and annual inflation decreased to 8.5 percent in July from 9.1 percent in June. Core inflation rose by only 0.3 percent month on month while expected to increase by 0.5 percent, and the annual core CPI remained unchanged as it was expected to rise to 6.1 percent from 5.9 percent in June. While there was a 68% probability that the Fed will increase interest rates by 75 bps in September before the data in the US money markets, this probability decreased to 32% after the data.

El-Erian: Risk of recession still remains in the USA

Famous economist Mohamed El-Erdian, who is also an advisor to insurance giant Allianz, states that it is too early to say that the possibility of a recession in the USA has disappeared. In his article for the Financial Times, El-Erian said, “It is too early to say that there is no recession risk in the USA. Increases in interest rates and the Fed’s shrinkage of its balance sheet may upset the economy and the markets,” he warns, warning that the danger has not passed yet. “Sometimes you love to be wrong, and I felt that way on a lot of things in the past year, whether it was inflation that was not temporary, whether the Fed was quickly falling behind on its inflation target, or one by one the best policy options to provide a ‘slow landing’ – be it inflation.” -Erian calls out to some experts, who comment on the latest US employment data that the US can avoid a recession for now, and says, “I think it’s too early to declare the recession bout is over, and the bond market seems to be aware of it.”

Before the data, markets expected a 113 bps rate hike from the ECB until the end of the year, and this expectation decreased to 105. It is almost certain that the ECB will continue with an increase of 50 bps in September. The dollar index fell by nearly 1 percent after the data, and fell below the 105 level. The euro/dollar parity, on the other hand, has exceeded the 1.03 level, which it has not seen since the beginning of July. The US 10-year yields fell to 2.717 percent with the data, and the German 10-year bond yields fell to 0.851 percent.

CDS of all growers in decline

With the expectation that the Fed will ‘wink’ in tightening with the decline in inflation, in other words, it will slow down and be more moderate in interest rate hikes, the risk appetite in global markets is also increasing and the risk premiums (CDS) of developing countries continued to fall on Wednesday. Turkey’s 5-year risk premium eased below 700 points for the first time since May 12 after the US CPI data on Wednesday, and fell to 692.45 as of 17:07 CET. Developing countries CDS index, which monitors the risk premiums of developing countries, moved towards 400 in July, while falling from the July summits for the last three weeks with the increasing risk appetite and the expectations that the Fed might put the brakes on, and fell below the 290 level on Wednesday.

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