Global (mild) stagflation
E The global growth will fall and the global interest rate will increase. Inflation will continue its current pace until the summer. After that, we will wait and see what happens. So will the Fed.
E The Fed is about to reverse course. December FOMC minutes suggest that in March there may be two simultaneous tightening moves. The FFR may be hiked and asset purchases may be cut at the same time.
E Previously, Fed watchers thought things would be different. A combined price (interest rate)/ quantity (reduced asset purchases) move wasn’t thought to conform to the Fed’s past behaviour, so people people thought rate hikes might be postponed.
E If the Fed is truly intent on not only reducing asset purchases but also on quickly shrinking its balance sheet, bad days are to come for the Dow and the S&P 500. This will also come as bad news for EM assets.
E If there will be another rate hike on top of the anticipated 3x25 basis points FFR increases, financial assets could be re-priced globally. This implies a 10% increase in the value of the dollar against the euro, and it also means pressure on EM currencies.
E However, the story of bear markets quickly replacing bull markets is an urban legend, and isn’t borne out by historical facts. There may be episodes of bulls v. bears throughout the year. E There is also the possibility that inflation falls in H2, both in the U.S. and elsewhere –including Turkey – and the Fed could stop there. A fourth rate hike may not happen, and the third rate hike might even be postponed.
E If not, and if inf lation concerns continue to loom large on the horizon even through the fall, the U.S. Treasury yield curve will (could) be flattened at a higher level by the end of the year. An inverted yield curve is unlikely. E Regardless, there is no way the CBRT can continue on its current course. At the very least, the cost of FX-denominated debt will rise, and TL will come under pressure. A balance sheet-cum-interest rate quantity & price intervention by the Fed is a rare thing to see. The Fed could bring out the big guns and this will have serious consequences.