World Economy At the Crossroad

I think the world economy’s is at the crossroad – whether there will be recession in the next 12 months.  For now, the majority consensus appeared that it is likely to see recession ahead as evidence from the two major bond indicators: 3 month-10 Year and latest 2 Year-10 Year Bond spread inversion.

There are handful of fund managers like Franklin Templeton etc are still in the opinion that the Fed might hike the rate as the US economy is robust.  Further to that, the inflation rate is “accelerating” in the US.  For the past 3 months, inflation rate exceeded Fed’s target of 2%…as such, the Fed needs to hike rate to curb the inflation.

One of the fund manager believes that the critical importance in deciding whether to cut or not is the debate on data driven external/domestic rather than the Fed’s subjective-subject-to-interpretation-ever-changing comments.

From their perspective: rate cut in July was meant to insure the economy against an external shock. External shocks, when well “insured” trigger higher rates, stronger dollar, and higher equities, while domestic shocks lead to lower rates lower dollar and lower equities.  Domestically-driven slowdowns occurred in 2001 and 2007, which then required more protracted cuts to fight.

With such much monies flooded into Bonds, and if the US economy is indeed strong and inflation rate were to accelerating, if we were to exclude any politics motive, the Fed’s next move is might disappoint the market – no rate cut.