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Financial markets reacted swiftly Friday morning to a currency crisis in Turkey, where the lira has tumbled to new lows against the American dollar. Simultaneously, President Trump has announced a hike in tariffs on Turkish metals as relations worsen between the two governments.

In the U.S., 10 Year Treasury yields fell below 2.9 percent for the first time in more than two weeks as bonds rallied on the global concern. Mortgage rates, which follow the 10Y, may edge lower in response.

Understanding Turkey

The crisis in Turkey has several facets. The lira’s descent began over concerns about the country’s economic health and rampant inflation there. The fallout pushed other emerging market currencies lower and the dollar to a new high.

City buildings
Courtesy of Samson Duborg-Rankin

Then conditions worsened when Turkish President Recep Tayyip Erdogan talked of “economic war,” which was met with a tweet from U.S. President Trump that he would double tariffs on Turkish steel and aluminum. The two governments have been in a long-running dispute, intensified this year by Turkey’s continued charges against an American missionary in Turkey that Washington believes are politically motivated.

The lira is now down more than 20 percent against the U.S. dollar this week and approximately 50 percent over the last year.

President Erdogan has asked Turks to exchange “any dollars, any euros or gold” for the domestic currency in order to shore up the lira.

“Hopefully we will overcome this disaster and we will also successfully overcome this economic war,” he said. “They have their dollars, but we have our people, our righteousness, and our God.”

Investors worldwide, already skeptical about Turkey’s financial health due to its high debt ratio, have moved into more secure bonds, such as US Treasurys. The event has also raised concerns about other nations with questionable financial health. But a broader economic crisis appears to be contained because of the relatively small size of the Turkish economy.

In the short term, the uncertainty will keep markets volatile and investors flocking to safety in US Treasury bonds. The 10 Year Treasury Note is currently trading at 2.887%. (See chart below)

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Inflation keeps rising

In other economic news, the core consumer price index in the U.S. hit a 10-year high this week on rising prices in July. Core consumer prices in July were 2.4 percent higher over the previous 12 months, the highest reading since 2008.

The price increases were broad-based, including higher costs of shelter, college tuition, airfare, furniture and used cars. The data pointed to a steady increase in inflation pressures that keeps the Federal Reserve on track to gradually raise interest rates.

Earlier in the week, wholesale prices in the producer price index remained mostly flat, but still near a 3 percent increase over the last month. Jobless claims also fell, showcasing a strong employment landscape.

All eyes now remain focused on the Fed’s September meeting, where analysts expect the third rate hike of the year. The Fed will be forced to weigh the hot U.S. economy against global concerns, such as Turkey. Expect some volatility in rates and markets in the days ahead.

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About the Author:

Greg Richardson - Senior Advisor of Capital Markets & Strategy

Greg Richardson is Movement's Senior Advisor of Capital Markets & Strategy and a contributing author to the Movement Blog. His weekly market update is a must-read commentary on financial markets, the mortgage industry and interest rates. Greg is an industry veteran who knows how to read the financial tea leaves and make complex industry data easy for loan officers, real estate agents and homebuyers to understand.