New York, NY ~ We believe that the 10-year treasury is finding a bottom in the 5.0% range as we are forecasting Europe will enter into a significant recession over the next 6 months. The government bond market is a global market with US Treasuries over 80% correlated with other global benchmark bonds. The recent rise in rates has been global and the key driver of that decline is tight global monetary policy with the global monetary base dropping by $1 Trillion or 4.2% over the last 2 Quarters. Notably, this is led by the ECB reducing the monetary base by an unprecedented $500 billion (US Money Supply up over 3.8% this year and .7% over the last 2 months).
The Eurozone is headed into a recession with the Eurozone GDP now-cast currently indicating a .3% contraction for Q3 which is an annualized decline of 1.2%. We will get the first estimate of Q3 Eurozone GDP on October 31st.
Italy’s Q3 now cast is -.6% or 2.4%, indicating a deep recession is underway. Italy has over 45% floating rate mortgages which makes consumer spending more vulnerable to interest rate hikes. We may see Italy come under attack from short sellers anticipating an Italian exit from the Eurozone as its debt to GDP is 140% and the budget deficit is 4.3% of GDP vs. the ECB target of 3%. Italy will also release Q3 GDP growth on October 31st.
We expect US growth to decelerate dramatically in Q4 into the 0-2% growth range as interest-sensitive sectors slow (but don’t crash) such as autos and housing. We believe that the economy is decelerating during October and we will get that data in November.
Validated by Tesla warning on the impact of rates on buyers.
Both wholesale and retail gasoline prices have dropped 10% in October, which makes a cool CPI/PCE/PPI print likely for the month as there is a 5% bleed-through of energy to the core.
We expect global interest rates to peak this year and decline next year as the ECB is likely to be forced to cut rates in the first half of 2024 due to an accelerating recession in the Eurozone. We forecast that the US 10-year bond yield is likely to fall into the 3-3.5% range in 2024 as global growth drops and the Global Monetary Base increases. We believe the US economy is likely to stay out of a recession, however, as an investment in housing, infrastructure, and technology proves resilient even in the face of very high-interest rates.
US Treasuries have performed in line with other benchmark bonds during the most recent sell-off so US-centric explanations are misguided, although strong US growth does have global implications. We expect, however, that the US external deficit of 95% of GDP with a deficit of 6% of GDP is manageable as the post-WWII nominal average GDP growth is over 6%, implying that the ratio of debt to GDP will be relatively stable over time.
Fed open market operations (unwinding reverse repo) have kept the US monetary base growing this year despite QT.