The Federal Reserve Bank of Philadelphia's manufacturing outlook index, released on July 22nd, plummeted to its lowest level since 1979, far exceeding all economists' expectations. Concurrently, the Conference Board's leading economic index for the United States in June also declined by 0.8%, marking the largest drop since April 2020.
As inflation expectations in the United States seem to have spiraled out of control, with inflation soaring to a high of 9%, the impact of this rise is expected to continue to drag down the economy. Wall Street, including Nomura, will likely resume hyping the narrative of an impending U.S. economic recession, and there are even signs pointing towards a potential collapse.
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Following the announcements by more U.S. IT giants to freeze hiring, this further accelerates the likelihood of the U.S. economy falling into a recession. The U.S. Department of Labor reported on July 22nd that the number of people applying for unemployment benefits has once again reached the highest level in eight months. This real-time hard indicator of the health of the U.S. economy shows that the U.S. labor market has begun to collapse, further intensifying market concerns about a U.S. economic recession.
Bank of America analysts have stated that many signals now indicate that the U.S. is on the verge of a recession, perhaps it has already occurred, or even a collapse. The Federal Reserve has also accepted the possibility that the aggressive monetary policy adopted to suppress inflation will lead the U.S. economy into a recession.
On July 22nd, the yield curve inversion between the 2-year and 10-year U.S. Treasury bonds expanded to 23.36 basis points, the deepest inversion in nearly twenty-two years, as investors digest the possibility of a 75 basis point interest rate hike by the Federal Reserve in July, which could push the U.S. economy to the brink of collapse. An inverted yield curve is typically seen as a pessimistic sign for economic prospects.
As the risk of a U.S. economic recession soars, the entire U.S. Treasury curve is reassessed to be lower.On July 19th, the Atlanta Fed's GDPNow model indicated that the U.S. economy is expected to contract by 1.6% in the second quarter, a more severe contraction than anticipated. This would imply that the U.S. economy is officially in recession, with GDP falling for two consecutive months (after a 1.6% contraction in the first quarter), suggesting that the U.S. economy is now on the brink of a recessionary collapse.
We have observed that while many economists agree that the U.S. may experience a recession in 2023, top Wall Street investor and cryptocurrency investment magnate Mike Novogratz, who worked at Goldman Sachs for 11 years and is dubbed the "Goldman Sachs of the cryptocurrency world," has given the most direct prediction to date: "The U.S. economy will collapse," Novogratz told the U.S. media outlet MarketWatch.
A new survey conducted by the Policy Research Center of the University of Chicago and the United Kingdom, involving 49 U.S. macroeconomic experts, also supports Novogratz's view. In fact, 38% of the economists surveyed believe that "the U.S. economy has already begun to collapse." What does this mean for the global market?
It is evident that U.S. interest rate hikes have increased borrowing costs in the country, triggering a strong sell-off in the U.S. bond market and the worst first-half sell-off of U.S. stocks since 1970, which has helped the U.S. Dollar Index soar to its highest level since mid-September 2002.
On July 22nd, the U.S. Libor-OIS spread approached its highest level since the 2008 financial tsunami, reaching 3.978%, indicating higher dollar financing costs. This will exacerbate the situation for some vulnerable markets, as the appeal of high-risk assets diminishes and investors begin to withdraw.
This also means that the U.S. aggressive interest rate hikes and quantitative tightening are impacting markets with singular economies, high inflation, high external debt, and short foreign reserves, even leading to the most severe economic crises and resulting in national bankruptcy.
For example, in recent times, the spillover effects of the Federal Reserve's substantial interest rate hikes and quantitative tightening have begun to manifest in Sri Lanka, making it the first country to declare bankruptcy amidst the Fed's "interest rate hike storm." This may only be the beginning, and the core logic behind this is actually quite simple.Because, with the accelerated devaluation of the US dollar leading to a rapid increase in commodity prices and the United States using the switch between loose and tight monetary policies, international reserve assets will be quickly consumed and lead to some debt and exchange rate risk "storms".
At the same time, against the backdrop of regional conflicts, some economies that are already heavily indebted are experiencing high inflation and facing issues such as food and fuel shortages. This is also the reason why some economies may see bankruptcy scenarios play out in more countries. However, this is not the end of the story, as current market data appears more concealed.
In a report published on July 18, global asset management firm Man Group explained that due to the inability to cope with the sudden increase in US dollar borrowing costs, Vietnam is very likely to be a victim of the United States' aggressive interest rate hikes and the collapse of the US economy, which will be harvested by the United States.
Experts in Vietnam's securities industry have said that with Vietnam currently tightening up its financial market situation, coupled with the rise in US dollar financing costs and the risk aversion driven by the US dollar index, this poses a threat to Vietnam's financial market and will affect all aspects of Vietnam's economy. This also indicates that Vietnam cannot avoid being harvested by US dollar capital. For example, most of the profits in Vietnamese factories are controlled by foreign manufacturers such as those in Europe and the United States.
In the economic forecast report released by the IMF on July 13, it emphasized that although Vietnam's foreign reserves and exports are increasing, the expansion of national US dollar foreign debt is even faster. Vietnam has been listed by international institutions as the country in Southeast Asia that most needs to consolidate its finances, warning Vietnam to be aware of inflation and default risks.According to a report by Vietnam Express on July 21, as of July 15, Vietnam's VN30 index had also plummeted by 21.1% from its 2022 peak. Although the Vietnamese stock market is currently undervalued, due to strong selling pressure in the Vietnamese market, some astute international funds are quietly withdrawing from the Vietnamese market in large amounts, with net sales reaching as high as 480 trillion Vietnamese dong in securities and financial assets.
In this regard, the American financial website ZeroHedge reported on July 17 that Vietnam and Sri Lanka have sounded the alarm for another 25 countries. The effect of the Federal Reserve's interest rate hike this time will continue to be evident. To find the answer, we used Bloomberg's data to rank the countries with the highest default risk.
The default risks of these 25 fragile countries, from high to low, are: El Salvador, Ghana, North African countries (such as Tunisia), Pakistan, Egypt, Kenya, Argentina, Ukraine, Bahrain, Namibia, Brazil, Angola, Senegal, Rwanda, South Africa, Costa Rica, Gabon, Morocco, Ecuador, Turkey, the Dominican Republic, Ethiopia, Colombia, Nigeria, and Mexico.
Most of these countries are located on the lower end of the industrial chain, with a single economic structure and a high dependence on the US dollar. Therefore, the easing or tightening of the Federal Reserve's monetary policy will have a significant impact on the economies, inflation, and debt of these countries, especially due to the high risk of sovereign bond defaults caused by excessive debt and a sharp rise in Treasury yields in these countries.
However, while some fragile markets are facing the withdrawal of international funds, the US financial market will also encounter the same situation.
According to the report on international capital flows released by the US Department of the Treasury on July 19, in May, while global official institutions net sold $34.1 billion in US Treasury bonds, international investors also sold $9.15 billion in US stocks, further increasing from the April sale scale of $7.04 billion, and marking the 5th consecutive month of sales, the longest consecutive sales period since the end of 2018.