The Bond Market Rout Continues

Treasury rates spiked on Wednesday to multiyear highs in what was the biggest one-day move for the 10-year Treasury yield in nearly 18 months. There were a number of reasons cited for the sudden move higher:

Much stronger-than-expected surveys on U.S. economic activity, especially in the manufacturing sector

Hawkish commentary from a top Federal Reserve official

A U.S. Treasury auction for five-year notes that was met with poor demand

Stubbornly high oil prices with WTI crude rising 2%

The 10-year Treasury note yield

 popped more than 13 basis points to 5.104% and reached a level not seen since July 2007. The move gained steam after the 10-year yield broke through the key 5% level. It marked the benchmark yield’s biggest one-day move since April 7, 2025 — when it surged 16.6 points.

The 2-year Treasury note yield

, which is most sensitive to expected changes in Fed policy, jumped more than 11 basis points to 4.889% and hit its highest level since May 2024 as traders increased their bet the Federal Reserve would need to hike again in October.

The 30-year Treasury

 yield gained more than 9 basis points to 5.398%. It hit the highest level since June 2007. One basis point is equal to 0.01%, and yields and prices move in opposite directions.

“This is the market telling us we’ve entered a genuine re-tightening cycle, said Tony Miano, global investment strategy analyst at Wells Fargo Investment Institute. “The Fed’s 25 basis point hike last week to 3.75%–4% was its first increase since 2023, and the dot plot signaled another this year.”

“A week ago you could argue that was a one-and-done insurance move or a one and maybe December hike). Today’s price action says investors no longer believe that,” he added. Bottom line, “you can’t fool or hide in the bond market – unless the Fed gets inflation under control the long end of the curve is going to continue to come under pressure.”

Read the rest here.

See also this for a more detailed discussion of the recent craziness in the markets.

Ambrose Evans-Pritchard Sees Serious Threats to the Global Economy

Four powerful shocks are hitting the world economy at the same time. They are escalating and feeding on each other, driving a commodity spiral that can end only in an inflationary blow-off.

The effects are ripping through the global bond markets and confronting central banks with an impossible dilemma. Yields on 10-year US Treasuries have surpassed 5pc, smashing through the Maginot defences of Scott Bessent, the US treasury secretary.

The Bloomberg commodity index has risen 48pc this year, accelerating in pace and spreading in breadth from energy to industrial metals and grains. The fever has spread to shipping and freight.

Lloyd’s List says the cost of a giant VLCC oil tanker on the Baltic Exchange has hit $1m (£740,000) a day, eight times the cost in January. “What is happening is truly unprecedented,” said Erik Broekhuizen, the head of shipping at Poten & Partners.

The futures markets are no longer pricing in a quick return to normal, as they were in those first insouciant weeks of the Iran war, when traders still believed in the all-conquering might of the US navy. Brent futures contracts are over $90 a barrel all the way out to the spring of 2027.

European gas futures are locking in prices through the winter that are three times higher than last winter. Wheat, maize and soybeans are all in “contango”: futures prices are well above today’s spot prices.

Read the rest here.

The Economic Risks From Trump's War Are Real and Growing

Economists are skeptical of new inflation numbers

Thursday saw the release of a much lighter-than-expected consumer price report for November, breaking from the recent trend of sticky inflation.

Stocks jumped. Yields fell. Odds of a Federal Reserve rate increased.

And many economists scratched their heads.

The Bureau of Labor Statistics reported that the consumer price index had an annual inflation rate of 2.7% last month, while core CPI — a measure that excludes volatile food and energy prices — was even lower at 2.6%. Both were below what economists had been estimating, as those polled by Dow Jones called for an annual headline rate of 3.1% and a rate on core CPI of 3%.

The November data release Thursday was delayed by 8 days because of the U.S. government shutdown, but more importantly, the October data was canceled, leaving it to the BLS to make certain methodological assumptions about the prior month’s inflation levels.

Those assumptions in the methodology were not clear to economists and were not fully explained in the release.

“The downside surprise reflects weakness in both goods and services, but may be partly due to methodological issues. The BLS might have carried forward prices in some categories, effectively assuming 0% inflation,” Michael Gapen, chief U.S. economist at Morgan Stanley, said in a note, deeming the November reading as “noisy” in a way that’s “difficult to draw strong conclusions.”

“If these technical factors are the main source of weakness, we could see reacceleration in December,” Gapen added.

Read the rest here.

Not saying that they are cooking the numbers. But this report has raised a lot of eyebrows. And it's worth remembering that Trump fired the last head of BLS after an unfavorable jobs report. 

Argentina: One year of Javier Milei

Argentina’s Milei marks one year in office. Here’s how his shock measures are reshaping the economy

Argentina's Mr Market Javier Milei wants to make austerity great again

Javier Milei's Argentina in 6 Charts

The Debt Delusion: Why Modern Monetary Theory Is a Luxury Belief

While Fed Chair Jerome Powell made the rounds on Capitol Hill this week, discussions about the Federal Reserve’s expectations for inflation have once again come to the forefront. Unsustainable government spending is raising inflationary pressures with potentially devastating consequences for the US economy. In this context, the belief that debt doesn’t matter, especially championed by proponents of Modern Monetary Theory (MMT), appears more detached from reality than ever.

This notion, prevalent on the political left, claims that a government that issues its own currency can never run out of money in the same way a household or business might. Advocates argue that such a government can always print more money to pay off its debts, thereby sidestepping any constraints imposed by traditional fiscal discipline. While this might sound appealing, it’s a classic example of what sociologists call a “luxury belief”—an idea that is primarily held by those insulated from its real-world consequences.

“We are a sovereign currency, we can print all the money we want”—former House Budget Committee Chair John Yarmuth (D‑KY) at a congressional hearing.

Luxury beliefs, as sociologist Rob Henderson describes, are ideas that confer status on the rich while often burdening the less fortunate. The concept has traditionally been associated with cultural and social norms, but it applies equally well to economic theories like MMT. Proponents of this “magic money” theory, often shielded by their own economic stability, pay too little heed to how elegant theories on paper can lead to catastrophic outcomes in the real world.

A key argument against MMT’s false promise is that printing money for the sake of financing government spending leads to inflation. When a government prints money to cover excessive spending, it increases the money supply without a corresponding increase in goods and services. This creates an imbalance between available resources and the money available to purchase them, with the result being inflation—an increase in the price level that erodes the purchasing power of money. For the wealthy, this might mean adjustments to their investment portfolios or higher prices on certain items. For the poor and working class, however, inflation can be devastating.

Read the rest here.

Ben Bernanke Takes Aim at Central Bank Forecasts

Central banks the world over failed to predict the surge in inflation that started three years ago. Now they’re trying to learn from their mistakes.

For the Bank of England, that meant commissioning former Federal Reserve Chairman Ben Bernanke to write a review of the U.K. monetary authority’s forecasting system. The implications of the findings, published Friday, could reverberate far beyond Britain.

To be fair to the BOE, it didn’t do particularly worse than others in failing to see that supply-chain problems, energy-price spikes, and geopolitical tensions would generate the worst bout of inflation in a generation. Bernanke, who guided the U.S. through the 2008-09 financial crisis and won the Nobel Prize in 2022 for his work on the impact of bank runs in markets, notes the shocks were difficult to forecast.

“The forecasting and policy challenges faced by the Bank of England in recent years were hardly unique,” said Bernanke, now a fellow at the Brookings Institution. “The Bank, like other central banks and policy institutions, will be working to draw the appropriate lessons from this experience.”

Read the rest here.

Javier Milei is sworn in as president of Argentina amidst grave economic crisis

BUENOS AIRES, Argentina (AP) — It wasn’t the most uplifting of inaugural addresses. Rather, Argentina’s newly empowered President Javier Milei presented figures to lay bare the scope of the nation’s economic “emergency,” and sought to prepare the public for a shock adjustment with drastic public spending cuts.

“We don’t have alternatives and we don’t have time. We don’t have margin for sterile discussions. Our country demands action, and immediate action. The political class left the country at the brink of its biggest crisis in history,” he said in his inaugural address to thousands of supporters in the capital, Buenos Aires. “We don’t desire the hard decisions that will be need to be made in coming weeks, but lamentably they didn’t leave us any option.”

South America’s second largest economy is suffering 143% annual inflation, the currency has plunged and four in 10 Argentines are impoverished. The nation has a yawning fiscal deficit, a trade deficit of $43 billion, plus a daunting $45 billion debt to the International Monetary Fund, with $10.6 billion due to the multilateral and private creditors by April. “There’s no money,” is Milei’s common refrain. He repeated it Sunday to explain why a gradualist approach to the situation, which would require financing, was not an option.

But he promised the adjustment would almost entirely affect the state rather than the private sector, and that it represented the first step toward regaining prosperity.

“We know that in the short term the situation will worsen, but soon we will see the fruits of our effort, having created the base for solid and sustainable growth,” he said.

Read the rest here.

Milei to Send ‘Shock’ Package to Argentina’s Congress on Day One

(Bloomberg) -- President-elect Javier Milei plans to call congress into an extraordinary session and send a large package of reforms to stabilize Argentina’s economy on Dec. 11, the day after his inauguration.

“This is urgent,” he said in an interview broadcast Sunday by LN+ TV, adding that Argentina can’t wait for the usual start of congressional sessions in March. “Solving the central bank’s problems as soon as possible” and “halting monetary emission” that causes inflation are among the urgent issues he intends to tackle with lawmakers, he said.

Once his government gets public finances and the central bank balance sheet in order, it will be able to start lifting capital controls and unifying the country’s diverse exchange rates, Milei said, repeating that he never promised to close the central bank on day one.

The positive market reaction to Milei’s win in the Nov. 19 runoff, evidenced by a rally of sovereign bonds and YPF’s debt, emboldened the libertarian economist to pursue his “shock therapy” agenda of fiscal adjustment.

“This has given us greater strength to redouble our bets in favor of fiscal order,” he said, adding the market read the signs his incoming government sent “to perfection.”

“If the financial markets accompany us and interest rates fall, this will be painful but a lot less painful,” he said of the impact of the spending cuts his government proposes — a key concern in a country where more than 40% of the population lives below the poverty line.

Read the rest here.

See also Javier Milei Is Not Donald Trump.  

Inflation is red hot but bonds are doing well. What gives?

So, inflation is smoking hot and the Fed is hiking interest rates by numbers not seen in decades. Normally this would be like the kiss of death for bonds. Yet after a sharp spike earlier in the year, bond yields have stabilized and even declined somewhat recently. And despite multiple warning signs of an impending recession, stocks have likewise found their footing and seem to be recovering a bit after the worst first six months of a trading year since 1970. Concurrently the US dollar is soaring against other currencies and gold, a traditional hedge against inflation, has gotten the snot pounded out of it over the last several weeks. 

What the heck is going on?

The answer is in two parts. First, a lot of traders think the inflation is peaking, and thanks to aggressive rate hikes, will start falling next year. Some of them are placing bets on that scenario. 

Secondly, and IMO probably more significantly, as bad as things are here, they are significantly worse elsewhere. Europe is an economic disaster area thanks to severe shortages of just about everything compounded by Russia's war in Ukraine. Add to this are the highly justified fears that Russia might cut off oil and gas exports to Europe and you have something resembling a controlled state of panic over there. There is serious discussion of gas and fuel rationing for the first time since the aftermath of World War II. 

Further is the slow reaction of foreign central banks to combat inflation which is worse in much of the rest of the world. Thus far it looks like in Europe the decision has been made that inflation is the lesser of evils and will need to be tolerated until the Ukrainian situation calms down and some normalcy returns to the broader economy. And it is even more pronounced in some less developed economies where inflation is so severe that it is threatening the stability of the country. Think Turkey, Argentina (a country with defaulting on their debt rivaling soccer for the national pastime) and Venezuela which, thanks to decades of socialism, was an economic basket case long before the pandemic. 

All of this is making the US dollar highly attractive. A lot of foreign money is pouring into US securities which is driving down bond yields, despite the high inflation, and shoring up stock prices. In short, the dollar is looking like the safest house in a crappy neighborhood right now. 

So, is there any upside to all of this for the average American? Not a lot, unless you are planning a trip abroad. In which case you will find your dollar delivering the best return in recent memory with all major currencies at multi-decade lows relative to the USD. If this continues it could prove injurious to the American economy as our goods and services will become more expensive to export and foreign goods and services will become cheaper. 

Inflation Hits 9%

Paging Mr. Volcker. Mr. Paul Volcker please pick up the white courtesy phone.

Financial Markets Take a Hit

April's southward drift has continued in May as all three major stock indices fell yesterday by more than 3%. The tech heavy NASDAQ was down by 5% following the Fed's decision to raise their fund rates by a half percentage. The Fed Rate remain below 1% with inflation officially clocking in at 8.5%. Bond yields continue to rise which means currently held bonds are losing value. The yield on the ten year US bond is now slightly over 3%. In 2020 the yield fell below .5%. Oil remains firmly over $100/barrel and metals have been sluggish amid expectations of further interest rate hikes. Bitcoin fell sharply and as of this post is trading under $36k. Broadly speaking Wall Street seems to be less than impressed by the Fed's actions to curb inflation and the expectation is that even if inflation peaks, it is likely to remain high in the near to intermediate term. Some observers have noted that according to the Taylor Rule, interest rates should be near 10%. But a move that high would almost certainly plunge the country into a severe recession.  It now appears that with the inflation genie out of its bottle, getting it back in is going to be both challenging and painful. 

Bank of England raises interest rates amid warnings of recession and 10% inflation

The government is facing calls to launch a fresh package of emergency financial support for households after the Bank of England warned Britain’s economy could plunge into recession before the end of the year.

As the nation went to the polls in the local elections, the Bank raised interest rates from 0.75% to 1% to tackle spiralling inflation made worse by Russia’s war in Ukraine. With a fresh jump in home energy bills expected in October, it forecast inflation would rise above 10% this year, the highest level since 1982.

The rate rise brings borrowing costs to levels unseen since the recession caused by the 2008 financial crisis, but the Bank’s monetary policy committee (MPC) said action was warranted despite the gathering economic storm clouds.

Andrew Bailey, the Bank’s governor, said there was a “narrow path” the central bank had to navigate between the dual risks of inflation and recession facing the British economy. He said the inflation shock had been made worse by the impact on supply chains from Covid lockdowns in China and the rise in energy costs since Vladimir Putin’s invasion.

Read the rest here. 

Jim Grant on bonds, interest rates and inflation

US Inflation Rate is 8.5%- Highest since 1981

Prices that consumers pay for everyday items surged in March to their highest levels since the early days of the Reagan administration, according to Labor Department data released Tuesday.

The consumer price index, which measures a wide-ranging basket of goods and services, jumped 8.5% from a year ago on an unadjusted basis, above even the already elevated Dow Jones estimate for 8.4%.

Excluding food and energy, the CPI increased 6.5%, in line with the expectation.

The data reflected price rises not seen in the U.S. since the stagflation days of the late 1970s and early ’80s. March’s headline reading in fact was the highest since December 1981. Core inflation was the hottest since August 1982.

However, core inflation appeared to be ebbing, rising 0.3% for the month, less than the 0.5% estimate.

Despite the increases, markets reacted positively to the report. Stock market futures rose and government bond yields declined.

“The big news in the March report was that core price pressures finally appear to be moderating,” wrote Andrew Hunter, senior U.S. economist at Capital Economics. Hunter said he thinks the March increase will “mark the peak” for inflation as year-over-year comparisons drive the numbers lower and energy prices subside.

Still, due to the surge in inflation, real earnings, despite rising 5.6% from a year ago, weren’t keeping pace with the cost of living. Real average hourly earnings posted a seasonally adjusted 0.8% decline for the month, according to a separate Bureau of Labor Statistics report.

The inability of wages to keep up with costs could add to inflation pressures.

The Atlanta Federal Reserve wage tracker for March indicated gains of another 6% which is “symptomatic of inflation pressures continuing to broaden,” said Brian Coulton, chief economist at Fitch Ratings. Coulton pointed out that the core inflation deceleration was due largely to a drop in auto prices, while other prices continued to show increases.

Read the rest here.

World may be on cusp of new inflationary era, says central bank chief

The world economy may be on the cusp of a new inflationary era with persistently higher growth in consumer prices due to the retreat of globalisation, a leading central bank chief has said.

Agustín Carstens, head of the Basel-based Bank for International Settlements – which is known as the central bank of central banks – said there was a strong risk that prices would rise uncontrollably without a sharp rise in interest rates above existing plans.

In a speech setting out risks for persistently higher rates of inflation, Carstens said higher borrowing costs could be required for several years to curb the risk of spiralling prices wreaking long-term damage on the economies of the industrialised world.

However, his comments are disputed as other experts warn that high inflation will probably choke consumer spending and economic growth – reducing the urgency for significantly higher interest rates.

Data has shown inflation heading towards 10% in several countries, mostly in response to rising gas and oil prices after Vladimir Putin’s invasion of Ukraine. In February, the consumer prices index hit 6.2% in the UK – the highest level since the 1990s. In March, the CPI in Germany and Spain hit 7.3% and 9.8% respectively.

The Bank of England is on course to raise its base rate to 2% next year according to City investors, up from the current level of 0.75% after Threadneedle Street began hiking rates from a record low of 0.1% in December last year.

Last month the US Federal Reserve approved a 0.25 percentage point hike from near zero, the first increase since December 2018, with a signal it plans several more rate rises this year.

Read the rest here.

Inflation is near 40 year high

Inflation jumped to the highest level in nearly 40 years, fresh data released on Friday showed, as supply chain disruptions, rapid consumer demand and rising housing costs combined to fuel the strongest inflationary burst in a generation.

The rising costs spell trouble for officials at the Federal Reserve and the White House, who are trying to calibrate policy at a moment when the labor market has yet to completely heal from the pandemic, but the risk that price increases could become more lasting is increasing.

The Consumer Price Index climbed by 6.8 percent in the year through November, the data showed, the fastest pace since 1982. After stripping out food and fuel, which can move around a lot from month to month, inflation climbed by 4.9 percent.

Prices were up 0.8 percent from October, according to the report. That’s slightly slower than the prior monthly increase, but still an unusually rapid pace.

The question is what happens next. Fed officials have become increasingly concerned about rising price — both because the uptick has lasted longer than expected and because it shows signs of broadening to areas less affected by the pandemic.

Read the rest here.

Bitcoin Plunges (Again)

Crypto craziness was on display again with the latest huge sell off in Bitcoin, which dropped around 17% over the last 24 hrs. Yet its proponents continue to tout it as a "safe haven" for currency volatility. Meanwhile in Turkey; the lira continues its rapid decline with inflation now running around 20%. Turks are rushing to convert their money... into dollars and gold.

Inflation tops 6%

Consumer inflation surged in October as fuel costs picked up, supply chains remained under pressure and rents moved higher — bad news for economic policymakers at the Federal Reserve and for the Biden White House, which had been emphasizing a recent slowdown in price gains.

Inflation picked up to 0.9 percent last month from September, a Labor Department report showed, faster than the prior month’s increase of 0.4 percent and well above economists’ expectations. So-called core price gains, which strip out products like food and fuel, also accelerated.

Overall prices have climbed by 6.2 percent over the past 12 months, the fastest pace since 1990.

The fresh data scupper a White House talking point. Officials had regularly pointed out that while price gains were faster than usual, at least they were slowing down from rapid summertime readings.

But instead of cooling off toward the end of 2022 as many policymakers had expected, inflation rates remain far faster than the 2 percent annual gains the Federal Reserve aims for on average over time. While the Fed sets its goal using a separate measure of inflation — the Personal Consumption Expenditures index — that too has picked up sharply this year. The C.P.I. reports come out faster, and help to feed into the Fed’s favored gauge, so they are closely watched by economists and Wall Street investors.

Administration and Fed officials alike still expect rapid inflation to eventually fade. But they have had to revise how quickly that might happen: Supply chains remain badly snarled, and demand for goods is holding up and helping to fuel higher prices. As wages begin to rise in many sectors amid labor shortages, there are reasons to expect that some employers might charge their customers more to cover climbing worker costs.

“It is now clear that this process will take longer than initially expected, and the inflation overshoot will likely get worse before it gets better,” Goldman Sachs economists wrote in a research analysis this week.

Read the rest here.

Inflation: Team transitory is getting nervous

All year the Federal Reserve’s message on inflation has been consistent: This year’s surge is transitory, and inflation will soon return close to the central bank’s 2% target.

Yet look more closely, and it is clear officials are turning less sanguine—and that explains growing eagerness to start raising interest rates.

Last September, long before the supply bottlenecks emerged, the median forecast by Fed officials was for core inflation (which excludes food and energy) in 2022 of 1.8%. Every few months since then they have nudged that up, and in the forecasts released Wednesday they see core inflation next year at 2.3%.

While current-year forecasts get pushed around a lot by temporary factors such as a jump in oil prices, the next-year forecast reflects where inflation is expected to settle once temporary factors recede. The message from the Fed’s latest projections is that “transitory” is lasting an awfully long time. Indeed, next year’s projected 2.3% is the highest next-year core inflation forecast since projections were first published in 2007, according to Derek Tang of Monetary Policy Analytics.

This might explain why the Fed is accelerating plans to raise interest rates. The Fed is now buying $120 billion a month in bonds and wants that to fall to zero before it starts to raise rates. On Wednesday, the Fed signaled it would likely start tapering those bond purchases in November, which means the process would be over by mid-2022, clearing the way for a rate increase. Half of Fed officials think rates will start rising by late next year. Just last March, a majority of officials didn’t see that happening until 2024.

What changed? It isn’t because the economic outlook is stronger. In fact, officials now see slower growth and higher unemployment than they did in March. Chairman Jerome Powell explained that some officials simply wanted more confidence the expected recovery would materialize. But inflation risks clearly play a part.

Read the rest here.