EUR/USD - 1.0540 Despite euro's resumption of decline from May's 1.0786 peak to a 1-month bottom of 1.0360 in post-FOMC Wednesday, subsequent rebound and then yesterday's rally above 1.0507 (now support) to 1.0601 on broad-based usd's selloff signals choppy swings above May's 5-year 1.0350 trough would continue but 1.0642 should cap upside and yield retreat. On the downside, only a daily close below 1.0507 would indicate aforesaid recovery over and risk weakness towards 1.0452. Data to be released on Friday New Zealand manufacturing PMI, Japan interest rate decision. Italy trade balance, EU HICP. Canada producer prices, U.S. industrial production, capacity utilization, manufacturing output and leading index.  

Equity markets are experiencing another day of pain on Thursday as central banks continue to signal a willingness to sacrifice the economy in order to get inflation under control. Central banks are full of surprises this week whether it's the Fed accepting a recession as the cost of price stability, the SNB raising rates by 50 basis points out of nowhere, the ECB holding an emergency meeting or the BoE seemingly crossing its fingers and hoping 11% inflation goes away on its own. What will the BoJ bring after a busy week in the bond markets? The SNB hike was arguably the most surprising of the lot, with the consensus before being that they would stand pat and resist further strengthening the currency which has been boosted by safe-haven flows. Not only did it not, but it also hiked beyond all expectations and appears to have warmed to the idea of a strong franc. I'd be more amazed at the shift if the SNB under Thomas Jordan didn't have a history of sudden u-turns without warning. Perhaps the most surprising thing about the BoE today was how underwhelming the policy response was. At a time when the central bank announced that inflation is now expected to peak above 11% in October, it also raised interest rates by a measly 25 basis points and didn't show a particular willingness to accelerate the tightening to combat those price pressures. Of course, every economy is different and the MPC is clearly of the view that inflation will come down naturally over time, referencing the fact that energy and core goods account for around 80% of the inflation overshoot. It seems quite the gamble though and one that could prove disastrous if it doesn't pay off but once more, markets and the central bank are taking drastically different views on the outlook for rates. The BoE appears ready to slow things down while markets are expecting multiple super-sized hikes in the coming months. Central banks haven't fared too well against the markets this year and it's hard to make a case for the BoE this time around. Another central bank that's having a hard time is the BoJ which has been forced to fiercely defend its yield curve control policy tool this week. It's swimming against a vicious tide and conditions are becoming more treacherous by the day. Governor Kuroda has stood firm against any suggestion the policy should be tweaked but could the BoJ have one more surprise in store for us? IEA offers a bleak outlook for crude Oil prices are relatively flat on Thursday, after once again edging lower earlier in the session. Crude has been paring gains in recent days after a huge run higher over the previous month but prices are still extremely high. Risks remain tilted to the upside even as recession risks take some of the heat out of the market. The good news just keeps coming in the oil market, with the IEA reporting today that it expects record global oil demand next year paired with supply struggling to keep pace as Russia is forced to shut in more wells and other producers are constrained by capacity. In other words, the market will remain extremely tight and prices high. A recession may ridiculously be the only hope for balance in the market and lower prices. Although refining capacity won't even hit pre-Covid levels next year which will continue to boost prices at the pump. ​ Gold recovery may not have legs A volatile week in gold has seen it break through the bottom of the recent range only to recover a little around $1,800. A stronger dollar remains a major headwind for the yellow metal and in these conditions, it's hard to imagine it falling out of favour. Yields are continuing to rise and central banks are hiking aggressively in a desperate attempt to rein in inflation. It doesn't bode well for gold even in these risk-averse markets. Another blow on the way for bitcoin? Bitcoin HODLers must be getting a little nervous at this point despite their unwavering belief in the future of the cryptocurrency. The short-term outlook is pretty bleak for bitcoin and even recent headlines haven't been in its favour. With central banks everywhere raising rates and risk appetite taking a beating on a regular basis, the bullish case is getting weaker by the day. And a break of $20,000 could be the next major blow.

The BOE is likely to hike the key rate by another 25 bps to 1.25% on Thursday. A surprise 50 bps hike cannot be ruled out if the BOE prioritizes inflation control. GBP/USD has room to recover but it depends on the bank’s tightening guidance. GBP/USD could confirm a bullish reversal from two-year troughs should the Bank of England (BOE) surprise markets by announcing a 50 basis point interest rate hike on Thursday at 11:00 GMT.   BOE could take global central banks’ lead Until a day ago, a 50 bps rate hike by the UK central bank could not be imagined. With the US Federal Reserve (Fed), however, now seen delivering a 75 bps rate hike at its June policy meeting, seeing the BOE going large on the rate lift-off is not unthinkable. Adding to this, the Reserve Bank of Australia (RBA) announced a bigger-than-expected 50 bps hike earlier this month and the Reserve Bank of New Zealand (RBNZ) also hiked by a half-point. Markets have priced in a roughly 40% chance of a double-dose lift-off at the June MPC meeting. According to the Bloomberg survey of economists, three of the BOE’s nine officials are expected to vote for a 50 bps hike, with the majority backing a 25 basis point move. Meanwhile, the latest Reuters poll of economists showed that the BOE is set to deliver a quarter-point hike on June 16 to 1.25%, its fifth consecutive rate rise. Two more are expected this year to 1.75%, which means rate increases in August and November. I believe the main reason the BOE may opt for a  bigger rate hike is to show that it prioritizes inflation. The central bank needs to show a much stronger response to control inflation, which is likely to peak at around 10% by October. The inflation expectations remain high, in the face of the UK Finance Minister Rishi Sunak’s £15 billion cost-of-living package, calling for a quick monetary policy response before the inflation problem gets out of hand. Also, the fact that the public’s net satisfaction with the BOE’s control of inflation is at the lowest level ever could compel it to deal with the inflation issue head-on. Concerns over the UK growth cannot be ruled out, as the economy heads towards the inevitable, with two back-to-back monthly negative GDP prints. Therefore, the rate hike voting composition will hold the key alongside the central bank’s outlook on the economic growth and further policy tightening. In absence of Governor Andrew Bailey’s press conference, the central bank’s forward guidance will be closely examined. Trading GBP/USD with the BOE It could be a Thursday turnaround for GBP/USD bulls, as oversold conditions on the daily chart could collaborate with the hawkish 50 bps surprise from the BOE. Therefore, an extended recovery towards 1.2300 could be in the offing on a 50 bps lift-off. However, if the central bank chooses to state a ‘gradual pace of tightening in the coming meetings or highlights growth risks, a further upside in the pair could be capped. GBP/USD could witness a ‘sell the fact’ trading should the BOE hike the rates by the expected 25 bps. GBP could also take a beating if the MPC voting composition shows a majority voting in favor of a smaller increase. In such a case, the pair could head back towards its multi-month lows below 1.1950. An outrightly dovish outcome could imply that the BOE is more concerned about the growing risks of recession even though inflation is broadening out. Meanwhile, cable’s reaction to the BOE announcements could also depend on the fallout of the expected hawkish Fed decision, which could have a significant impact on the market sentiment, as well as, the US dollar valuations.

The Federal Reserve has raised rates by 75 bps points, a substantial move. Firm commitments signal the Fed prioritizes crushing inflation and is ready to assume the consequences. The dollar is set to continue its gradual advance, building on monetary policy divergence.  Confidence in the Fed may lower long-term yields, supporting gold.  Is the Federal Reserve serious enough about fighting inflation? That is the main question for markets, and my answer is yes. The decision only provides a nod to the Fed's other mandate of full employment, and undoubtedly focuses on crushing prices. The words "strongly committed" are a significant upgrade to the Fed's language.  Could the Fed have done more? Yes, Powell is not Paul Volcker, who destroyed the US economy in the 1980s to change Americans' inflation mindset. However, the moves have undoubtedly conveyed a clear message to markets.  For the dollar, the reaction is straightforward monetary policy divergence favors the greenback, which could continue advancing against all its peers. Moreover, other central banks may be forced to act in response to the Fed. The first tests are for the SNB, BOE and BOJ, all set to make announcements in the next 36 hours.  For gold, the place to watch is 10-year yields. If my analysis is correct and the Fed convinces markets of its determination to fight inflation, it would send long-term yields lower – perhaps even forecasting an outright recession. For XAU/USD, a fall now could be a buying opportunity.  What about stocks? Markets prefer lower rates and cheap money. Fast rate hikes are adverse, especially to tech stocks but also to broader markets. However, the hope that the lower terminal rate could help shares recover – markets fall in the elevator shaft and climb up the stairs. Stocks have suffered and may begin looking for a bottom. 

EUR/USD - 1.0428 Although euro's selloff from Thur's post-ECB 1.0773 high to a near 1-month bottom at 1.0398 in Asia Tue due to active safe-haven USD's buying on global stock market rout and rally in US yields suggests re-test of May's 5-year trough at 1.0350 would be seen, subsequent rebound would yield range trading and below would extend towards 1.0320. On the upside, only a daily close above 1.0507 would indicate a temporary trough is in place and risk stronger retracement towards 1.0535, then 1.0550. Data to be released on Wednesday New Zealand current account, Japan machinery orders, tertiary industry activities, Australia consumer sentiment, China industrial output, retail sales. Germany wholesale price index, Swiss producer/import price, France CPI, EU trade balance, industrial production. U.S. MBA mortgage application, NY Fed manufacturing, import prices, export prices, retail sales, business inventories, NAHB housing market index, Fed interest rate decision and Canada housing starts.

With the Federal Reserve expected to raise interest rates for the third time this year, the U.S. dollar is hovering near multi-year and in the case of USD/JPY, multi-decade highs. The greenback retreated slightly on the eve of FOMC but don’t be mistaken, the Federal Reserve will be very hawkish on Wednesday. A half point increase has been completely discounted and in the last 24 hours, expectations for a 75bp hike soared to 96% according to the CME’s Fed Watch tool.  Is Inflation Alarming Enough to Risk Recession? A 75bp hike would be a technically and psychologically big move - the largest one time hike for the Fed since 1994. How the U.S. dollar reacts will depend entirely on whether the central bank opts for 50bp or 75bp move. For the Fed, the question is whether inflation conditions are alarming enough for a drastic move that would inevitably crush the equity markets and heighten the risk of recession next year.   The short answer is YES.  Consumer prices hit a 40 year high in May and the pain will continue as producer prices rise 10.8% year over year. Short and long term inflation expectations continued to climb according to the June University of Michigan consumer sentiment index. Both the Federal Reserve and President Biden have made fighting inflation a top priority. To put this into perspective, according to Moody’s Analytics, the typical U.S. household is spending about $460 more each month on the same basket of goods and services compared to last year. With oil prices hitting a 3 month high today, there are no signs of price pressures letting up.  The Fed could get away with raising rates by 75bp tomorrow because the labor market remains strong with the unemployment rate hovering near its lowest rate since the 1960s.   The problem is that rising prices and rising interest rates means a rising risk of recession. According to a Financial Times poll taken last week (before expectations for 75bp rate hike surged) 70% of leading economists expect the U.S. economy to fall into recession in 2023.  Their concern is that the speed and velocity of the Federal Reserve’s rate hikes would lead to a deeper contraction in spending and growth. Retail sales are due for release tomorrow and a soft release would be a daunting reminder of the risks ahead. The recent drop in the personal savings rate to its lowest level since 2008 tells us that Americans are already dipping into their savings to cope with rising prices. Unfortunately according to 40% of the economists surveyed, 2.8% rates this year (which would be 50bp hikes in June, July and September) would not be enough to bring prices down. Traders are getting ahead of the game by pricing in 4% rates by the middle of next year.   How to Trade FOMC Aside from the Federal Reserve’s decision on interest rates, economic projections and their dot plot will be released tomorrow. We are looking for an increase in their CPI forecast along with a decrease in their GDP projections. Minimally, the dot plot should show their Federal funds rate projection rising from 1.9% in 2022 to at least 2.6%. The 2023 forecast should rise from 2.8% to at least 3.5%.    For Wednesday’s FOMC announcement, there are two catalysts for big moves in currencies, equities and Treasuries. The first being the 2pm rate decision which will be accompanied by the economic forecasts and dot plot. The dot plot will provide some guidance on future policy path but the extent of the Federal Reserve’s hawkishness may not truly be known until Fed Chairman Powell delivers his press conference 30 minutes later.  When it comes to trading FOMC, there is usually a knee jerk reaction to the 2pm announcement and this month the reaction will be significant. Then a retracement followed by consolidation about 10 to 15 minutes after the initial move before a real more durable move about 15 minutes after Fed Chairman Powell delivers his prepared comments. For the dollar and USD/JPY in particular, 150 is a far target but an achievable one if the Fed raises by 75bp and suggests 50bp of tightening at the next 2 to 3 meetings. However if they only raise rates by 50bp instead of 75bp, even if they intend to continue tightening consistently over the next few months, the dollar should sell off in disappointment with the better trade being long EUR/USD than short USD/JPY.  However, with a clear aggressive path of tightening still ahead, the dollar’s pullback will be short-lived.

And the line from The Big Short movie, “it all came crashing down” comes to mind. We have been warning of precisely this since the start of the year, and even with the huge collapse already seen in US equities, I am not changing my view that investors should continue to play defence. "Protect your portfolios” from the roof-tops we should all scream. The situation is not a buy the dip or look across the valley scenario. People need to step back and see the bigger historical picture. What I am about to say will not be a surprise to anyone, but investors need to connect the dots. At the point of highest confidence and enthusiasm in global stock markets and others, there were already worrying signs coming from inflation, not transitory, a moderation in manufacturing globally, and consumer sentiment. Sales have remained firm, but consumer sentiment has been nose-diving to GFC levels for some time. Suggesting there may be a 'last hurrah' by consumers taking place at the moment. Both in the USA and elsewhere. We haven’t even gotten to the war in Ukraine yet? Permanently higher food and energy prices and even shortages of both. The most powerful factor of all is that the Federal Reserve and other western central banks have fallen well behind the worst inflation curve in decades. This has resulted in their now being set on a course to be aggressively raising rates against ever higher inflation. Inflation that is impervious to interest rate hikes in any case. The end result is inevitably the squeezing of consumers and business alike by sky rocketing prices and higher interest rates. Mortgage stress will grow substantially, potentially triggering a second great housing market crisis in the USA this century. If that happens, property price decline on top of high inflation particularly in the energy sector, and already economic crisis levels consumer confidence, then a particularly bad recession will take hold. This scenario could unfold as soon as later this year. Even Larry Summers agreed with me over the weekend that the US is at risk of recession within the next year. I believe it could be imminent this year. The stock market crash already seen is due for a sharp upward correction of some kind, but it does not look likely anytime soon given the very bearish close in New York trading yesterday. When a rally does eventuate, investors should take advantage and continue to hedge their portfolios against further downside risk. The big buys of the moment are the US dollar and Oil. Gold too. Though it may have further deleveraging downside to be seen first. In the end though, it will again become a safe-haven refuge. It would be great to be wrong, but this increasingly looks like an historic unwinding of a giant tulip bulb period where central banks went out of their way to throw fuel on the fire.

The S&P 500 is on course to enter bear market territory at the start of this week, as US futures open sharply lower on the back of the the higher-than-expected US inflation report at the end of last week. US stocks lost 5% last week and closed lower for the ninth time in ten weeks. The risk off trade is in full swing. Not only are global stocks under pressure, but so are US Treasuries. The 2-year US Treasury yield is now approaching 3.2%, and short-term US yields have risen by 11 basis points so far this morning. The US yield-curve is fast approaching negative territory, it is currently +9 basis points, it is worth noting that an inverted yield curve is a recessionary signal. Thus, the macro-economic environment has deteriorated as we lead up to this week’s Federal Reserve meeting and the Bank of England meeting.  75bp rate rise now on the table at the Fed  Both central banks are expected to raise interest rates this week. There is now a 100% chance of a Fed rate hike this week, however, expectations of the size of the rate hike have shifted considerably over the last month. A month ago, there was an 85% chance of a 50bp rate hike to 125-150 basis points, however, the chance of a 50bp rate hike is currently 63%. Instead, post last week’s bumper inflation report, expectations have risen that the Fed will raise rates by 75bps this week to 150-175bps. The probability of a 75bp rate hike this week is now just under 40%. This is a huge shift in sentiment and comes after an inflation report that shocked even some of the biggest hawks in the market, it is also the main reason why risk sentiment is tanking.  Peak inflation still a pipe dream for US  The problem for the Fed is down to three things: shelter costs, energy costs and food prices, the latter are rising at their fastest annual pace in 41 years. The world is short of nearly all commodities including grains and hydrocarbons, which is playing havoc with consumer price inflation in the US and beyond. These were the biggest upward pressures on US price growth in May. The energy index rose nearly 4% last month, which has essentially rendered the Fed’s rate hikes so far almost useless. The core rate of US inflation is also surging. Core CPI rose by 0.6% on the month, the annual index rose by 6%. Core price increases were broad based, but they were particularly large for shelter, airline fares, used cars and truck costs. Thus, at this stage, the argument that we have reached peak inflation seem premature. What is interesting is that gasoline and diesel demand in the US is falling and has been for the past decade. Instead, what is keeping the price of energy high is that there is not enough sweet crude in the world to meet demand. This has been exacerbated by the crisis in Russia, with the world now shunning Russian oil. This has bid up the price for oil elsewhere, including in other Opec countries and in the US. The next fear for central bankers is that this issue becomes politicised in the US with some politicians calling for crude exports to be halted. If that happens then we could see not only deteriorating diplomatic relations, but also another kick in the guts for the global economy, especially in Europe and in the emerging markets, which could see greater downward pressure on their stock markets in the coming weeks and months.  Bank of England can’t save the pound  Looking at the BOE, there is pressure on the UK economic picture, however, that is unlikely to stop the BOE from raising rates by 25bps this Thursday. Instead, there is a growing consensus that the BOE may have to halt rate hikes towards the end of this year. This will likely weigh on the UK-US yield differential in the future, which remains negative for GBP/USD in our view. As risk sentiment continues to sour, we have seen GBP/USD fall by more than 1% at the start of this week to $1.2180. The ease with which this pair gave up the $1.22 handle leads us to believe that a move back to $1.20 is on the cards. This is ultimately down to a stronger economic backdrop in the US, and a deteriorating economic outlook in the UK, which has a higher inflation and tax burden than most other G7 economies. Thus, it is hard to see how even rate hikes from the BOE can save the pound from dropping below $1.20 at this stage. Instead, we think that only government support for the consumer, which does not seem to be forthcoming, would significantly change the outlook for...

Friday’s Consumer Price Index Report sent shockwaves through financial markets. The 8.6% annual reading was yet another new multi-decade high – dealing a body blow to analysts who believed inflation pressures had peaked. Investors now fear the Federal Reserve will have to undertake more aggressive tightening actions. Both bonds and stocks tumbled into the close of trading last week. Precious metals markets, however, perked up. Gold rallied while silver, which has been lagging of late, managed to put together a small advance on Friday. More impressive (and perhaps more telling) was the price action in the mining sector. Leading silver producers First Majestic (AG), Pan American Silver (PAAS), and Hecla Mining (HL) gained 6.6%, 5.9%, and 7.4%, respectively, on Friday. Investors are seeking safe haven in the precious metals sector, including mining stocks as proxies for gold and silver. Of course, no mining company or exchange-traded product tied to precious metals spot prices can substitute for the real thing. Demand for physical bullion has remained strong in recent months and could jump dramatically during the next round of turmoil in financial markets. The risk of a stock market crash is increasing as the Fed hikes into an environment of collapsing social mood. The latest University of Michigan Survey of Consumers shows consumer sentiment has plunged to a record low. So have President Joe Biden’s approval ratings. The economy is in deep trouble due to a variety of factors. Chief among them is inflation pressures that just won’t relent. The 8.6% CPI reading doesn’t capture the full extent of the inflation problem. The CPI understates housing, energy, and food costs through substitutions, hedonic adjustments, and other gimmicks. The American Institute for Economic Research puts out an Everyday Price Index. This alternative inflation measure surged at an annualized rate of 20.6% through the first five months of 2022, led by surging fuel costs. The Everyday Price Index is up 12.8% from last year, the fastest yearly pace on record. “Sustained elevated price increases are likely distorting economic activity by influencing consumer and business decisions,” according to the American Institute for Economic Research. “Furthermore, price pressures have resulted in a new Fed tightening cycle, raising the risk of a policy mistake.” Since Fed officials have been wrong every step of the way in diagnosing the inflation problem, their attempts to cure it will likely fail as well. They were too late to act. Now the tough medicine they are trying to deliver could cause financial markets to convulse. Risks to precious metals markets exist as well during periods of heightened volatility. However, the opportunities for stagflation-driven gains in the months and years ahead make gold and silver attractive as core safe havens from vulnerable stock and bond markets.

In the space of a few days, markets have gone from optimism that inflation might be on the cusp of plateauing, to rising apprehension that we could not only see higher prices, but that prices might well remain higher for a lot longer than originally thought. This concern has started to manifest itself into the reaction function of central banks, who appear belatedly to have realised that inflation is starting to run out of control, along with consumer expectations of higher prices. In the last few weeks, we’ve seen the Reserve Bank of New Zealand, Bank of Canada, and the Reserve Bank of Australia hike rate by 50bps, with the Federal Reserve set to follow suit later this week, although after Friday’s hot CPI report there is some speculation that we could see the Fed hike by 75bps. The US CPI report on Friday also put paid to any prospect that there might be a September pause to the Federal Reserve’s rate hiking cycle, as inflation jumped to another 40-year peak at 8.6%, sending stock markets sharply lower, the US dollar surging along with yields, a trend that has continued in Asia markets this morning, with the US dollar hitting its highest level against the Japanese yen since August 1998. US markets posted their worst decline since January, while the DAX and FTSE100 both posted their biggest weekly falls in 3 months, with all of these markets set to open sharply lower.   The US 2-year yield rose 25bps to close at its highest level since 2008, at 3.06%, as did the US 5-year yield, which rose to close above 3.25% and above both the 10- and 30-year yield, usually a key indicator that a recession is coming. Friday’s pessimism was exacerbated by a collapse in Michigan consumer confidence for June which fell to a record low of 50.2, while 5–10-year inflation expectations hit their highest levels since June 2008. Against this backdrop it's hard to make the case for anything but a return to the lows we saw last month for the S&P500 and the Nasdaq 100, and the prospect of further weakness, as we look ahead to another week of important central bank meetings, with the Federal Reserve, Bank of England, Swiss National Bank and Bank of Japan all set to meet. Of those four, only the Federal Reserve and the Bank of England are expected to raise rates this week, however in both cases the extent of the rate rises now isn’t as clear cut as it was a week ago. Prior to Friday the case for a 50bps rate hike by the Fed was a nailed-on certainty and it remains so, however in some parts there has been a shift in thinking towards a 75bps move, hence Friday’s sharp moves. This still seems unlikely, based on one month’s data, however there is also an argument that the Bank of England may also have to hike by more than the 25bps that they are expected to move by on Thursday. The inflation outlook has become much uglier, and irrespective of the Bank of England’s concerns about what a 50bps may do to an already fragile economy, they may well have no choice if they are to re-establish their battered reputation, when it comes to fighting inflation. Today’s European open looks set to see further weakness, with this week’s focus set to be the central bank meetings, as well as the latest economic data, starting today with the latest UK GDP numbers for April. These are expected to show a weak economy, battered by the big jump in energy prices, with the index of services forecast to grow by 0.1%, after declining -0.2% in March. The headline monthly number which showed a fall of -0.1% in March, will be lucky if we show any growth at all in April, while on a 3 monthly basis we can expect to see a decline from 0.8% to 0.4%. Industrial and manufacturing production, which both showed declines in March of -0.2%, might see a modest rebound but it’s likely to be feeble at best. The only silver lining is likely to be in tomorrow’s wages and unemployment data, with wage growth set to remain strong and unemployment at near 50-year lows.   EUR/USD – Having fallen back to the 1.0530 area we look set to for a retest of the lows last month and the 2017 lows at 1.0340/50. This remains a key barrier for a move towards parity. Resistance now lies at 1.0630, as well as trend line resistance from the highs this year at 1.0720. GBP/USD – Fell below the 1.2450 area which opens up the May lows at 1.2155. The key support lies between 1.1980 and the 1.2000 area. The 1.2450 area now becomes resistance. EUR/GBP –Has continued to struggle at the 0.8600...

For the second time this year, significant portions of the yield curve are inverted (shorter-term treasuries yield more than longer-term treasuries). Treasury yields from the New York Fed, chart by Mish These inversions are strong recession warnings although the spreads are small and the most watched 2-10 spread is still positive. However, the 3-year, 5-year, and 7-year notes all yield more than the 30-year long bond.  Curiously, the 20-year note yield is way out of line with everything else as the following chart shows. Yield Curve to Scale Treasury yields from the New York Fed, chart by Mish The first bar is the Effective Fed Funds rate at 0.83%. Every following bar represents three months. Values between years are extrapolated evenly.  From three years to thirty years the yield curve is flat to inverted except for the 20-year note. I am not aware of anyone with an explanation for curious behavior. Yields at the short end of the curve rose sharply vs the longer-term notes following the consumer price report. That led to the inversions shown above.  Why Did Economists Blow the CPI Forecast So Badly This Month? For discussion of the May CPI report. please see Why Did Economists Blow the CPI Forecast So Badly This Month? Also note the national price of gas topped $5.00 today for the first time. Yesterday I reported the Average Gas Price Just a Penny Shy of $5.00 a Gallon

US CPI rises above estimates as markets take fright. Equities fall across the board with even energy falling. Bond yields rise sharply with Barclays calling for a 75 basis point hike. The fallacy of hope is over and reality is finally beginning to dawn. For much of the past two weeks, we have been told by numerous statisticians and economists that inflation would begin to level off as price pressures abated and comparisons eased. In particular, we were fed the bullish line that the rolling nature of the CPI meant comparisons were due to get easier as lower used car prices from last year rolled out and so the overall CPI would level off. This sharply contrasted with what most of us felt every time we went to the gas station and to the grocery store. For those of us fortunate enough to be able to find a building contractor it was difficult to keep up with the scale of price hikes and raw material costs we had to stump up for on a monthly basis. That reality finally made its way down to the CPI print on Friday and the seemingly unprepared investor cohort reacted with obvious shock. Equities quickly shed 3% across most sectors while bond yields surged. While the incline in CPI does begin to resemble the north face of the Eiger it looks even worse when we scale our chart accordingly and just look at the last 40 years instead of 75! What is more striking is the shadest areas above represent recessions. There appears to be no way that the US can avoid a recession with inflation running this hot. The equity market is not yet fully pricing this in. Corporate earnings estimates are still much too high and analysts will begin to downgrade post the next quarter. The latest data from Refinitiv has Q2 2022 earnings growth averaging at 5.4% based on analyst estimates. They had every reason to be optimistic based on Q1 earnings growth of 11%. Already we are witnessing some pullback to earnings estimates. Excluding the energy sector, the average growth of earnings for Q2 is forecast to fall by 2%.   The bond market has now moved to price in more tightening by year-end and as a results, the yield sensitive Nasdaq had been targetted once more. Growth stocks will continue to be offloaded while value will continue to outperform. But all sectors look set for more losses. The front end of the bond curve continues to outperform with 2-year rates now above 3%. However, the curve is flattening now as a recession risk is increasingly priced in by the bond market while the equity market lags behind as ever. Consumer confidence is falling globally and the latest University of Michigan Sentiment Survey confirmed this.   SPY technical outlook We had been eyeing a move to break $415 as the pain trade was higher. However, this CPI print has now likely obliterated any chance of a break for the foreseeable future. We still feel positioning is overly bearish but this time it appears the crowd is correct. That brings the Fibonacci retracement at $380 into view with $383 being the May low. This level is likely to be key but so far we have witnessed incredibly choppy trading so this move lower may not be smooth. A break of $380 means $350 is increasingly likely. SPY daily SPY weekly Earnings week ahead Little to excite but some interesting late releases from Kroger, Adobe and Oracle. Source: Benzinga Pro Economic releases There is little to keep an eye on apart from retail sales on Wednesday. That can either confirm or deny the bear market. Consumer demand looks to be holding up as savings are drained but this is a short-term solution. Expect hawkish Fed speak for the week ahead. The bond market remains the key indicator in our view. Yields should march higher and with the added pressure from QT it seems inevitable that the ten-year will begin to move to 4%.