Strategists believe that this data indicates that the central bank does not need much effort to plunge the economy into recession, and central banks such as the Federal Reserve will soon face their first challenge with "higher and longer" interest rates

Macro strategist Simon White stated that the interest rate market has begun to accept the slogan of central bank governors that "high interest rates will last longer". However, if the economy is closer to recession than surface data suggests, this claim may soon be put to the test.

At last week's Jackson Hole seminar, central bank governors from various countries did not dispel people's views on their intention to maintain high interest rates for a longer period of time.

In the United States, since June, the actual peak value of SOFR, a broad indicator measuring the cost of overnight borrowing with US treasury bond bonds as collateral, has remained above 2%. The short-term actual yield is also at a historical high, with the yield of 2-year inflation protected bonds (TIPS) approaching its highest point since 2004 (excluding the peak of the financial crisis).

The real interest rates in the UK and Europe are rapidly catching up with those in the US, but they are still below zero. However, based on the expected short-term interest rates and the level of CPI fixed swaps, the actual policy interest rates of the Bank of England and the European Central Bank will turn positive by October.

The European Central Bank's real interest rate is expected to remain around 1%, while the UK's real interest rate is expected to continue to rise to over 3% in the first half of next year. In the United States, it is expected that the actual interest rate will remain at 2% -3% in the next 12 months. At present, the market is accepting signals of long-term high interest rates.

But this tightening environment will conflict with what looks more like a recession in the economy, which will test the central bank's determination to maintain high interest rates. The poor PMI index in Europe and the UK reminds people that the economy is very fragile. The problem with economic growth so close to zero is that the central bank only needs to tighten a little more and the economy will fall into recession.

White said that recessions often occur suddenly and usually when they appear to be good on the surface.

Take the United States as an example. Although Wall Street generally believes that the US economy is expected to achieve a soft landing, there are still some reliable indicators indicating that its economy will experience a recession in the near future.

This is not to say that economic recession has become a foregone conclusion, but such an indicator should not be ignored, as it captures the universality of recession (many places have become worse at the same time) and the essence of its periodic changes. White warned that the situation looks good... before they collapse.

Ironically, the Federal Reserve may have to abandon this idea as they try to convey that it will maintain high interest rates for a longer period of time.

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