You have now digested the June CPI report. It’s been all over the media, separated and dissected for traditional crude analysis. Headline above 9% (annual) for the first time in a very long time, again being the highest in over forty years, mainly due to the usual suspects, food and energy (responsible for over half of the increase).
From this point of view, anyone can understand the politics of the situation. The average American needs to eat and will probably fill up his automobile regularly (lots of trucks and SUVs).
Mainstream media and politics demand your focus on the Federal Reserve and rate hikes (QT added). However, moving an outdated money market rate will have no effect on the supply of gasoline or vegetables and meat. Officials have tried to sell the public — and the markets — a version of the consumer price Phillips curve to sell proxy rate hikes as a plausible solution.
This is where prices and market positioning tell us something very important about the current situation as well as how it will most likely be resolved. When the Bureau of Labor Statistics released its CPI report on Wednesday morning, the broader bond market initially sold off quite dramatically, as any keen observer would have expected.
Rates both at the front end of each curve as well as those at the outer maturities jumped together. These policies behind a now even higher CPI require the Fed to raise its benchmark interest rates that much more in an attempt to assuage public anger, to give the impression that the government is doing something, and will do much more, to “fight against inflation”. .”
Then something terrible happened. Around 10:10 a.m. EDT, long rates fell. Yes they tear down abruptly while those in front remained as high as they had been.
The result was the most inverted entire yield curve since 2007; so much so that the 52-week (12-month) Treasury bill rate was sent 26 basis points above the yield on 10-year Treasury bills!
The inversion is not new in 2022 and has progressed rapidly back and forth to the point where it has now hit the bills. As many people may know, yield curve inversion is associated with recessions for a reason. Although they are told to pay attention only to specific parts of the Treasury market, such as the difference between the 2-year note rate and the 10-year note rate (2s10s), the fact is that any reversal does not matter where is a powerful threat.
And propagate an even more powerful reversal both on what and when.
Worst of all are Eurodollar futures, a market where the biggest players in the world hedge the biggest leveraged portfolios you can imagine containing a range of financial issues that most don’t. can’t. The monetary system itself uses these contracts to manage perceptions of all basic financial and economic fundamentals, including inflation probabilities, as well as growth/opportunity or security prospects.
Unlike those at the Fed, with so many trillions at stake, traders here can’t afford to be political or cavalier; this is why the Eurodollar futures curve has repeatedly predicted future conditions with useful accuracy while traditional econometric forecasts are never even usable as toilet paper.
More than a decade ago, this curve had reversed the warning of an impending crisis from November 2006 – alarms that those in the Federal Reserve and the media quickly ignored (willingly admitting it in private discussions ). And while the market situation only got worse, more reversed, the Fed left the public sitting fat, dumb and happy as the increasingly dire situation followed the course set by reversed futures contracts on the eurodollar (and treasury bills).
Yet, as bad as all of this would get in 2007, the Eurodollar curve has never been so terribly distorted. as it is now especially after the exchanges on Wednesday.
It is simply unprecedented. These are terms that you never want to see associated with indications, curves like this.
Like the USTs, the market initially sold back and forth on Wednesday, anticipating further rate hikes the FOMC will impose after the June CPI estimate. It didn’t take long for that to reverse apart from the initial few contracts up front; so that afterwards the market was trading for more Fed rate hikes that will end faster and become faster rate cuts sooner.
What do these real-money giants have to be so worried about to hedge in this particular way and to this telling degree? They will be protected from a situation where, in more literal terms, as I just wrote, Chairman Jerome Powell makes a few more political rate hikes due to an even higher CPI, but then stops short of turn 180 degrees to start faster. reduce these same rates.
And do all of this almost certainly from this year.
How would something like this happen?
To begin with, the CPIs for the coming months should be materially less; the end of “inflation” more and more in sight.
We see this growing possibility working its way into future market-based CPI expectations, TIPS inflation breakevens that have diverged significantly from WTI oil since late April. This means the same as inverted curves, but with the added benefit of including consumer price details in the outlook. In other words, the market is trading for lower Average CPIs even though oil prices don’t decline from here!
Nothing is ever certain about the future in the dynamic world we inhabit, especially when it comes to this incredibly complex system of money, markets and economy spanning the surface of the entire planet. However, on the whole, these markets (and there are others, from interest rate swaps to the US dollar exchange and commodity crash) providing useful, historically validated signals and warnings. are almost as certain as perhaps our consumer price nightmare will all be over shortly.
From then on, frying pans and fires.
It’s not about rate hikes or the Fed anymore, or even consumer prices. These ships left the edge of each market curve as those curves increasingly inverted. Recession, yes, but also recession plus a supernatural probability of an unhealthy dose of money and deflationary finances, more than has ever been experienced – if you haven’t noticed.
Even on the day the CPI hit nine, we were warned even more emphatically about anything else.
The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.