Hot inflation is still in the news! You can click the image if you’d like to read the hype.
CME Group was and still is overwhelmingly projecting a .75% rate hike coming on the 21st of the month. So there is no change to the macro view from that standpoint. Let’s see how some other yield markers are shaping up.
First and IMO most importantly, the 30yr Treasury yield is ticking a new high for the cycle this morning.
Switching to its long-term ‘Continuum’ view, the monthly chart we see that the long end of the bond market is still in ‘inflation’ mode and is certifying the Fed’s .75% hike to come. It is taking out 3.45% and now targets the long ago projected target of 4%, which I had originally felt would more likely come after a retreat to test the neckline but instead looks locked and loaded now, not for later.
Counterintuitively, this could prove bearish for a longer-term inflationary view. Had the yield pulled back and put in a hard test of the neckline/2.5% area first the projection was for a hell of an inflation revival thereafter. Now, in my opinion, the long bond is shooting the moon and when it flames out the reversal could be epic. And Deflationary.
In breaking above the now green moving averages, a new paradigm is in place. But that does not mean it’s all inflation all the time. If it goes to 4% and then reverses sometime in 2023 a drop to 2% to 2.5% could sure feel deflationary.
Moving on, here is the 3 month T-bill yield telling the Fed ‘don’t you even think of wimping out next week!’…
Bottom Line
It’s the inflation true believers vs. the Fed being compelled by the bond market to continue to try to kill the inflation. Of course, ‘the inflation’ means not only energy, food, materials, etc. prices, it means stock market too. That pig was inflated in 2020 as we gauged every step of the way in 2020.
I’d continue to be concerned about the Fed being driven by bonds to the breaking point as it would be forced to choose beating inflation over propping the stock market.
Nothing has changed. It’s high risk right now although I must admit that my contrarian alarm bells are ringing in favor of a not too distant future reversal of the inflation hysteria.
Let me steal from Gary: Vampire will not be satisfied with just an invitation, his credibility is in question. He wants to be called again “the only game in the town” and be the committee that saves the world.
Well put. He’s always been coy when contemplating manufacturing new inflation cycles, but this time I think he’s going to go bull in a china shop first. Clear the landscape and get the people back in line.
Interestingly, since the public generally does not know (or much care) how inflation is manufactured (as they focus on 2 screwed up political parties), when the counter-cycle (or worse) engages the public will be begging for more inflation probably well before the Vampire is ready, after this near death experience (oh, wait…) for the bloodsucker.