With the reveal of US inflation points and EU long-term bond yields, it is possible to draw a picture on the current economic situation. And, finally, it might look good.
The global economy is still on a sword’s edge as of December 2022. Though talks of recession in 2023 have calmed down, many still think we have not quite hit the bottom yet. In fact, an OECD report revealed that after January 2023 the global economy should experience a steady rise until the end of the year.
On Tuesday important data started coming in that allows an evaluation of the current economic perspectives. EU long-term government bond yields and US inflation data. Tomorrow, the Federal Reserve will decide whether to hike interest rates again or be more cautious based on these data points.
First, EU long-term yields have come down, from 3.64% in October to 3.37% in November. What does this mean? Does the EU have more trust on its financial outlook or is it just a point of resistance that will be broken in future months?
Long-term bonds can be considered like government “shares” that will yield an interest over a long period of time (10 years). It means that if I buy €100 in long-term bonds with a 3% yield, I will get back €103 in 10 years.
EU long-term yields have experienced a steady rise from 0.63% in December 2021 to its highest level in October (the already mentioned 3.64%). These bonds increase in interest rate whenever the present economic outlook does not seem positive. They basically imply “Don’t invest in us now, invest in us for the future!”
However, as I said, such long-term yields are coming down. It might mean that the EU is more positive about the present, perhaps because they don’t believe they’ll fall into a recession anymore.
What does US inflation look like
And good signs for the American economy came as well on Tuesday with the November inflation reveal. It is at 7.1% year on year, a 0.1% increase from October. An increase nevertheless, but analysts expected it to be at 7.3%, so it is lower than previously thought.
This means that the Fed’s strategy is working. To fight inflation, they have raised interest rates up to 4%, from a 0-0.25% range at the beginning of the year. This has surely slowed down the economy (though not as much as previously imagined), but it is working to fight inflation.
So, what will the Fed do tomorrow? Since their strategy is working, analysts expect another 0.5% hike in interest rates. But since the economic outlook seems more positive (both in the US and in Europe) they might decide to be more cautious.
