Europe's Economic Engines France and Germany
Political Divisions Cause Sharp Rise in Government Bond Yields
Brazil and China Also Face Difficulties
Potential Capital Inflow into US Treasuries
Fed Has Capacity to Supply Market Liquidity
The U.S. Federal Reserve (Fed), which indicated it would adjust the pace of interest rate cuts, is expected to accelerate the pace of cuts next year due to recessions in major countries. As global funds, concerned about increased uncertainty, flock to safe assets like U.S. Treasury bonds, it is anticipated that this will ultimately support the Fed's interest rate cuts.
Financial media MarketWatch reported on the 25th (local time), citing experts, that political instability in Germany and France, the economic engines of Europe, the sharp depreciation of the Brazilian real, South America's largest economy, and China's population decline are concentrating funds into U.S. Treasuries, leading to the possibility that the Fed may cut interest rates four times next year.
Previously, the Fed suggested through its new dot plot last week that there could be two 0.25 percentage point cuts, totaling 0.5 percentage points, over the course of next year. This is a reduction from the four cuts totaling 1.0 percentage point forecasted in the September dot plot, but it now appears that four cuts may still be possible.
Regarding this, renowned investor Louis Navellier, founder of Navellier & Associates, pointed out, "Most Fed officials are overlooking scenarios where a global domino effect could collapse." He also predicted, "Due to inflows into U.S. Treasuries from recessions in major countries, the U.S. can still remain the world's growth engine, and the Fed is most likely to cut rates four times."
MarketWatch viewed that interest rate cuts in the Eurozone in the second half of next year would lead to a decline in U.S. Treasury yields in the bond market, supporting this four-cut scenario. The outlet stated, "The global interest rate collapse has just begun," and predicted that the European Central Bank (ECB) would cut policy rates four to five times next year due to the Eurozone recession.
France and Germany, the "twin engines" of the European economy, are experiencing ongoing turmoil amid economic recession and severe political division. Recently, government bond yields in France and Germany surged due to political turmoil, and funds selling these bonds are highly likely to flow into U.S. Treasuries in the future.
Brazil is also facing difficulties similar to those of France and Germany. The Brazilian real has depreciated 21% against the U.S. dollar this year. Despite left-leaning President Luiz In?cio Lula da Silva announcing a new fiscal rule last year to turn the fiscal balance into a surplus, the fiscal deficit remains stuck at about 10% of the annual gross domestic product (GDP) with no signs of improvement.
In addition, China, where the real estate crisis continues, is experiencing a clear slowdown in growth due to an annual population decline. Skepticism about economic recovery in China has strengthened, leading to increased demand for safe assets like government bonds, with the one-year government bond yield hitting its lowest level in about 20 years.
Founder Navellier stated, "Global economic pain is triggering capital outflows into U.S. Treasuries, lowering yields," and added, "The Fed will follow suit."
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