20 years of high interest rates while inflation continues. Can you see hope?

Unsurprisingly, the market continues to focus on inflation as the main driver of Fed policy and rate volatility. This week’s biggest inflation report combined with drama in the UK market has pushed interest rates to another 20-year high.

The UK is usually not factored into our assessment of US market performance, but the past three weeks have been a notable exception. The following chart shows how big international travel is. From this perspective, US interest rates appear to be mostly on the recovery track.

The most influential monthly report on inflation, indeed, given current preconceptions, the most influential of all economic reports, the Consumer Price Index (CPI), if not for the highly anticipated release. Resilience could have been better supplied. Private talk.

Interest rates were close to their pre-CPI week highs, but surged soon thereafter. The CPI spiked interest rates as inflation showed it was even higher than already high expectations. The more important ‘core’ CPI made a particularly nasty move, returning to multi-decade highs.

Bonds/rates don’t like inflation anyway, but they really don’t like it in 2022 when inflation is high enough to drive the most aggressive Fed rate hike campaign since the 80s. , pushed the Fed rate hike prospects closer to 5.0% by the middle of next year.

Interest rates aren’t the only thing that suffers from the Fed’s rate hikes. Stocks also tend to take a hit if the Fed enacts tougher policies, or if economic data appears to encourage Fed austerity measures. The combination of “indication” from this data and “confirmation” from the Fed is the proposition for 2022. Heavy losses in stocks and bonds are the conclusion.

Here are the details for this week’s stocks and bonds.

In particular, both have been able to recover surprisingly well after inflation data, but not for sustainable reasons. is shown below. Otherwise, skip and move on.

Behind the scenes, UK financial markets were in the midst of some big improvements on Thursday. The following chart shows the absolute change in UK and US bond yields this week. The drop in UK yields from the opening bell on Thursday the 13th to Friday morning was surprisingly large (0.55%).

Meanwhile, US 10-year yields were broadly flat. The “short cover” market phenomenon also played a role. This happens when interest rates fall so much that buyers leave traders who previously bet on rising interest rates. That extra buying acts to drive interest rates down further, thus perpetuating the cycle and resulting in a “short squeeze.”

Bond yields found a reason to rise Friday. A significant rise in UK bond yields is only part of the explanation. Fed speakers were making the rounds, acknowledging that global financial risks were taken into account, but not derailing their target of rate hikes.

Kansas City Fed President Esther George said: “It’s not just the rising inflation that’s worrying, it’s the pervasive nature of it. We may have to hold it for a while. Rising and may need to stay longer to cool prices.”

“Doomsday” rates are just another word for the cap of this particular Fed rate hike campaign. It’s something we might encounter in 2023 if the predictors are right. The terminal rate is now nearly 5% and George certainly knew this before these remarks.

Commenting on inflation data, St. Louis Fed President James Bullard said it suggested “inflation has become harmful and difficult to stop.” If you want a softer stance on rates, this is not what you want to hear from his Fed members.

I had other data. The Consumer Confidence Index for October showed a surprise rise in inflation expectations. This is a metric that the Fed is also eyeing. This rise could be lost in the long-term chart shuffle below, but importantly, it was the first time since March 2022 that the one-year outlook has risen.

Amid brusque Fed comments, brusque inflationary impact on sentiment data, and short cover drying up for bond buyers, rates have risen painfully, with 10-year yields surpassing 4% for the first time since 2008. Ended the week beyond. Things got even worse. Mortgage rates ended the week at his highest level in more than 20 years.

Having gone from just over 3% to about 7% in less than a year (up 2% in the last two months!), let’s take a closer look at the daily and weekly rates.

The first outbreak of the pandemic was the only time in the past 40 years that interest rates have been so volatile and lasted only two months. The current stint in volatility saw him plunge into “high” territory nine months ago and hasn’t really looked back. No one outside of the mortgage-watching generation of the early ’80s has seen anything like this.

What about that hope? Do you have anything visible?

As is often the case when discussing the future of financial markets, it’s “it depends.” It makes no sense to overtly PLAN about favorable interest rate outcomes in this environment, but at least this week’s weakness is his 4.0% level on the 10-year yield and/or the S&P.

Technical analysts can easily draw horizontal ‘support’ lines at these levels and find ways to assert a bounce. It is recommended to monitor these levels as important lines in the sand. The market tells us they matter. At the very least, we can assume that traders are starting to ask whether this is enough when it comes to the impact on inflation and the Fed’s policy response. Ultimately, if the data finds a worse direction, the Fed could be even more volatile and unfortunately interest rates could be even higher. Yes it depends on the data but above All of which can be approached with a little hope of less dire consequences.