Soft landing for the US?
A few choice charts via the Twittersphere to illustrate how market expectations have been evolving for interest rates (which is to say, they're most probably heading up, then fairly soon back down again).
Firstly, US manufacturing is sinking into recessionary territory, and an interesting chart via Andreas Steno Larsen and Macrobond suggests that bond yields will accordingly be heading lower, and perhaps sharply lower.
Secondly, 5-year inflation expectations have now slumped below the 2 per cent inflation target, suggesting that markets are becoming increasingly concerned interest rates may be tightened too far (hat tip to David Scutt, with the share).
Markets are pricing for a 75 basis points hike at Wednesday's FOMC Meeting.
And thirdly - and finally - financial markets expect the US Federal Reserve to hike rates towards 3½ per cent by the end of the calendar year, but then to be delivering a series of cuts in 2023 and 2024, to sink the Federal Funds Rate back below 2½ per cent by early 2025.
Source: Charlie Bilello
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Walking the tightrope
There's a similar tightrope to be walked in Australia, with policymakers aiming to ratchet up interest rates far enough to tame inflation over the remainder of 2022, but without going so far as to sink the economy back into recession next year.
The Reserve Bank of Australia's Governor Lowe noted in a speech last week that inflation expectations derived from indexed swaps suggest a high degree of confidence that inflation will average 2 point something over the decade ahead, but over the next year inflation is expected to be above the target range.
The Governor's speech appeared to suggest that a combination of a salvo interest rate hikes to cool demand combined with easing disruptions to supply chains should bring inflation back down to the target range in a reasonably timely manner.
Commodity prices have fallen sharply over the past month, which will help.
On a related note, tomorrow will see the release of the June quarter inflation figures for Australia.
Markets are looking for the headline result to slow from 2.1 per cent in Q1 to 1.9 per cent in Q2.
But that would still be enough to see an annual figure of above 6 per cent, with consumer price increases largely driven by the housing component, food, and fuel prices in the June quarter.
Core inflation is expected to come in at a similar level to Q1, when it printed at 1.4 per cent for the trimmed mean measure (and 1.2 per cent for the weighted median).
