As inflation in the United States hits its highest annual rate in over 40 years, the US central bank is almost certain to continue raising interest rates rather aggressively in the coming months as inflation continues to soar. The Fed's policy of raising interest rates to combat soaring inflation resulted in a significant increase in the cost of borrowing for everything from mortgages to bank loans, which could lead to a full-fledged recession as people begin to spend less to keep the economy afloat and businesses reduce expenses by laying off workers. In addition, uncertainty over Europe's energy supply is leading the latest round of worries and has sent prices skyrocketing against slumps in other commodities. This concern specifically spread extreme fear across the market of an upcoming recession. According to Nomura, a global financial services firm, many of the world's leading economies will fall into a recession within the next 12 months as central banks aggressively tighten monetary policy to fight inflation. Other than the US, Nomura again expects recessions in the eurozone, the UK, Japan, South Korea, Australia, and Canada the following year, as the firm stated in a research note. In addition, the renowned banker and CEO of JP Morgan Chase, Jamie Dimon, is preparing the largest US bank for an impending economic storm and alerting other investors. Furthermore, a visible sign of the world economy entering a synchronized growth slowdown can be seen, denoting that countries can no longer rely on a rebound in exports for growth.
The ever-continuing rate hikes by central banks are causing overwhelming concerns for investors in fear of sending economies into recession. In times of severe economic uncertainty, the US dollar is seen as a secure refuge. The prospect of inflation and recession continues to plague numerous nations, compelling global market participants to seek safe-haven currencies and assets. Safe-haven currency is leaning towards the USD, and the USD index (DXY) continues to strengthen at above 106, the highest in approximately 20 years. Meanwhile, the assets are leaning towards the cash market, and the US Treasury (UST bond), which carries the yields for ten years, keeps declining. In addition, the escalation of the USD will continue to rise for the next 3 to 4 months. Many non-USD currencies, particularly EM (Emerging Market) currencies, have declined due to the fluctuation of exchange rates, including the Rupiah. As the USD strengthened, the Rupiah reached its lowest level since May 2020 on Wednesday (6/7) at Rp15,000/US$. The depreciation persisted, and the downfall of Government Securities affected the stock market. IHSG reached its lowest point since 13 May 2022, declining nearly 3.5% to 6.559,6. According to Deputy Governor of Bank Indonesia, Dody Budi Waluyo, the weakening of the Rupiah aligned with other countries' currency, with the Rupiah performing better year to date, with -4.7% YTD as of Monday (7/4). Meanwhile, the euro tumbled to its weakest level in nearly 20 years against the US greenback on mounting concerns about a European energy crisis and recession. The eurozone currency dropped by almost 1.8% against the dollar to US$1.02 overnight, its weakest since December 2002.
The US real GDP declined in the first quarter of 2022 and is forecasted to drop even further in the second quarter. A recession is commonly indicated by two consecutive quarters of real GDP decline. Although the economy seems to be in a recession, it raises serious concerns. The coincident indicators, or those that frequently fluctuate concurrently with the state of the economy, appear to be in good shape, according to the National Bureau of Economic Research's Business Cycle Dating Committee. Real personal income has risen by 0.3%, employment has increased by 1.6%, the unemployment rate has dropped to 3.6%, industrial production has risen by 3.4%, real business sales increased by 4.5%, and consumer spending has grown by 1.5%. Additionally, US exports and orders for durable goods remain quite strong. Although nominal expenditure appears healthy in most areas of the economy, the actual activity is still stalled due to the high inflation rate. These factors in no way refute the idea that a recession is occurring. Chuck Robbins, CEO of Cisco, conveyed to CNBC in late May that the continuous talk about a recession may admittedly create an actual one. On the other hand, President Biden and his administration are trying hard to signal more confidence in the economy as they seek to address the growing worries. Treasury Secretary Janet Yellen stated that the US economy is very strong, as she conveyed that inflation makes people upset. Still, there is not anything to suggest that a recession is in the works. When all aspects are considered, the economy is not in a recession, but it is also not growing at a particularly quick pace.
Sources:
CNBC Indonesia
Forbes
The Guardian
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