I’ll let the charts do the talking this week. This is always a good idea when it’s been a while since you’ve had a broader look at markets. As far as I can see, not much has changed. The U.S. CPI report is still the most important economic report of the month. The violent sell-off in response to what was a small upside surprise to U.S. core inflation in August is all you need to know. Markets would like to see a sustained roll-over in inflation, and an associated pivot in Fed tightening. So far, this is not happening. Equities have suffered badly in the wake of the August CPI data, and a 75bp rate hike from the Fed later this month is now a done deal. Some sell-siders have even stuck their neck out, calling for a 100bp hike. It’s gnarly.
Read MoreIn my last view on markets, I asked whether inflation fears had peaked? Judging by the price action since, the answer would seem to be yes, tentatively. It’s a cliché, but true. Markets trade at the very thin margin of the flow of economic information, and this edge has shifted in the past month. Inflation is still high, but it is no longer accelerating rapidly, and evidence of increasingly fragile economic activity is piling up. The headline surveys have weakened materially, especially in Europe, and we recently learned that the US economy entered a technical recession in the first half of the year. For markets, this means monetary policy tightening will be less pervasive, both in terms of speed and sustainability. Upside inflation surprises now are associated with sharp flattening, even inversion, of interest rate curves, as markets perceive the window for policy tightening closing, fast.
Read MoreI don’t have a definitive answer to the question posed above, but I think it is fair to say that markets traded last week as if the answer is: ‘yes’. In Europe, bund yields plunged below 1.5%, after touching almost 2% earlier in the month, and Dec-22 euribor futures are now pricing-in 50bp less tightening than immediately after the June ECB meeting. The catalyst: a below-consensus PMI report and news that Russia is slowly, but surely turning off gas supply to Europe. In the UK, bond yields have fallen too, in response to a below-consensus core CPI print. And finally, in the US, Jerome Powell’s comment, in a testimony to Congress, that a recession is ‘a possibility’ as the Fed embarks on a series of rate hikes, and QT, similarly drove down bond yields across the curve.
Read MoreSpare a thought for the Fed. The hope that inflation had peaked in March was brutally dashed last week as headline inflation printed a new high, of 8.6%. A 50bp rate hike this month is now all but certain, with many forecasters looking for 75bp. We could also spare a thought for the BoE. The Old Lady told markets last time in convened that it expects inflation to rise above 10% by Q4, that the economy could well fall into recession, but that it will continue hiking anyway. Or maybe, we should spare a thought for the ECB. Last week, Ms. Lagarde informed investors that the central bank intends to raise rates by 50bp, at least, between now and September, followed by a "sustained and gradual" rate hikes. Yields and spreads rose on the day, likely more than the ECB would have expected, let alone liked, and the euro weakened. The central bank we shouldn't spare a thought for, however, is the BOJ, apparently.
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