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From Stagflation to Recession

Stagflation to Recession

According to the Bond markets we are moving from stagflation to a recession.

State of play: The two-year Treasury yield has fallen from a recent high of 3.44% on June 14 to 2.91% this morning. This implies the Fed will have to back off its rate-raising plans sooner than seemed likely last week, which is what it would do if inflation comes down and the economy takes a dive.

  • Since reaching a multi-decade high in April, Treasury “breakevens” — the rate of future inflation implied by the relative prices of inflation-protected versus regular bonds — have fallen sharply. Inflation of 2.53% per year over the next decade is now priced in, down half a percentage point from the spring.
  • Meanwhile, U.S. crude oil is down about 13% from its recent high on June 9, suggesting markets are pricing in lower demand (another feature of a weak economy).

The bottom line: The recent moves could unwind as quickly as they happened. Yet for now, prices are baking in slumping growth and diminishing price pressures.

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