On Thursday, the Fed ruled out further rate hikes for this year. The reduction of the central bank balance is also expected to come to an end sooner than expected. The first reaction of the market had been positive, but Investors came quickly to the conclusion, that if the Fed becomes skeptical, the economy does not have to be in good shape. The demand for safe bonds rose, which depressed the yields on long-term government bonds.
Inverted yield curve
What is special about this is that the 10-year government bond yields in the US have fallen slightly below the current three-month rate. This so-called inverted yield curve is widely regarded, as in recent history every US recession has been preceded by an inversion of the yield curve. However, not every inversion was followed by a recession. In addition, the period between inversion and recession has so far been very different. It is also unclear what significance the inversion currently has, as the bond markets are still strongly influenced by the massive market interventions of the central banks.
Waiting for the economy
However, it is undisputed that the global economy is in the midst of a slowdown. The strong stock market recovery in recent months is based on the assumption that this is a purely cyclical slowdown, but that the economy will recover. Weaker than expected leading indicators in the Eurozone and the U.S. suggest, that investors must continue to be patient. Given the strong gains in recent weeks, it is not surprising those investors taking some chips of the table.
The decoupling of the stock market from economic data has ended for the time being. The stimulating effects of a more generous monetary policy are priced in at current levels. Higher prices now require better economic data. China plays a special role here. After weaker demand from the Middle Kingdom has had a negative impact globally, the stimulus measures that have been initiated should have a positive impact in the coming months. Until then, a consolidation should be ahead of us.