The post-pandemic inflation surge clearly persisted too long for central banks to ignore. But investors skeptical of some multiyear regime change or paradigm shift still feel emboldened.
After a bruising start to the year, world markets caught a break in July.
Some relief was perhaps due after Ukraine-related energy and food price shocks in February compounded a post-pandemic inflation spike and forced months of dramatic re-pricing of interest rate, bond and stock markets.
The sort of synchronized monetary policy tightening investors braced for — described by the International Monetary Fund last week as "historically unprecedented" — is now well underway and recession fears mount as economic forecasts are slashed.
Rates markets are already peering over the hump and despite all the hawkishness from central banks feel the worst of the episode may have passed — even if visibility is limited for policymakers and investors alike.
Futures markets now see U.S. Federal Reserve policy rates peaking by the turn of the year at about 3.35% — about 1 percentage point above current rates, but also some 65 basis points below where they saw the so-called "terminal rate" in mid-June and now occurring three months earlier than assumed back then.
As significantly, they pencil in about half a point of rate cuts from there through 2023.
Exaggerated a bit by last week's U.S.-China tensions over Taiwan, 10-year U.S. Treasury yields dropped almost a full percentage point in just six weeks to as low as 2.51% while inflation-adjusted yields fell back to zero. The inversion of the 2-10-year yield curve, often cited as the most accurate harbinger of recession, deepened to the most since the dot.com recession at the turn of the century.
