Inflation surges
US headline inflation came in hot once again, printing well above expectations at 1 per cent for the month, and 8.6 per cent for the year, which is a fresh 40-year high.
President Biden, who at face value appears to be in cognitive decline in any case, is looking down the barrel of a tough time at the mid-term elections in November.
Rents, food, petrol, and energy prices have all been relentlessly strong, and 'sticky' core services inflation was also high.
Core inflation was hotter than desirable and came in at 0.63 per cent for the month, and 6 per cent for the year (slightly down from 6.2 per cent last month).
James Foster delivers the goods as always with the key charts:
Second-hand vehicle and some goods prices may now be falling, but overall there is still a lot of inflation, and it is now broad-based, with core services inflation now above 5 per cent, which is a 30-year high.
The bad news is that interest rate hikes will come quicker and steeper than expected, likely to above 3 per cent over the next year, and this may cause a sharp 10 to 20 per cent sell-off in risk assets.
It's also likely to be a tough 9 to 12 months ahead for cryptocurrencies and the like as risk-free returns have increased, reducing the flows into Ponzi type speculation (Australia's 10-year bond yield touched 3.8 per cent overnight).
The flip side to this is that demand destruction is also probably going to be swift as interest rates rise quickly over the next year, and indeed markets are pricing for interest rates to be cut again between Q2 2023 and Q2 2024.
Yield curve
One of the many favourite pastimes of screen jockeys is carefully watching the yield curve for signs of an inversion.
The concept is simple enough: as financial markets see the shit heading squarely for the fan, more capital is allocated to 10-year Treasury bonds, and longer term yields falling much faster than short-term yields can signal trouble ahoy.
You can see from the inversions which began in June 1989, July 2000, and August 2006, for example, that financial markets tend to anticipate recessions neatly ahead of time.
Although an effective tool over the past 40 years, this is hardly a foolproof indicator, of course, and you could certainly make a case that we haven't been living through a time of conventional policy.
Conspiracy theorists might also raise an eyebrow at the yield curve inversion which began in May 2019 - were we potentially heading for a recession anyway, or did markets somehow predict the pandemic ('plandemic'!)?
We might never know the answer to that particular teaser, but evidently the Federal Reserve faces a stiff task in pulling off a soft landing in 2023.
Since the yield curve flattened and then very briefly inverted in April, arguably this flagged an apparent risk of a US recession within 6 to 18 months.
