Inflation Markets Just Flashed Recession-Red-Flag For The First Time Since 2008

Amid all the talk of wage growth and surveys suggesting input and output prices are soaring, the market for 'inflation expectations' is suddenly flashing a recessionary red flag not seen since July 2008.

The last few months have seen short-term (5Y) inflation expectations in the breakevens market surge to their highest in 5 years; and while longer-dated inflation expectations have also risen, they have not kept pace with the short-end. A similar move was last seen in Q1/2 2008.

Simply put, markets are expecting an inflationary impulse in the short-term, but do not expect it to last as it will likely be swamped out by a recession as the economy is not grown fast enough to justify prices rising at that pace, and instead either profit margins will collapse or end demand shrivels as companies fail to pass through rising costs.

And, as a result, for the first time since July 2008, the inflation breakevens yield curve has inverted, with the market's expectations for 30Y inflation now below that just 5 years ahead.

What is especially notable, is that the last time this happened, the US was already deep in recession (and we note that each time the 5Y has approached the 30Y, it has backed away - which given the sensitivity of stocks to breakevens could be problem going forward).


spastic_colon Fri, 03/09/2018 - 09:00 Permalink

and the central banks are flashing a printer as they warm the engines................the no inflation meme is such bullshit which is why there will not be an official recession.

jm Fri, 03/09/2018 - 09:04 Permalink

Or more accurately speaking, the long end of the TIPS curve is held by a mere handful of institutions and there is more liquidity in the belly of the curve and it means nothing.

J J Pettigrew Fri, 03/09/2018 - 09:05 Permalink

The FED has kept rates below inflation for 9 years.....

though all we hear about is the fear of deflation...

and who spends less every year, every month?  Prices are rising now..and they have been...

and the CPI is a terrible....TERRIBLE metric...

Health Insurance spikes and doesnt even move the CPI needle though it sops up disposable income 

Dumpster Elite Fri, 03/09/2018 - 09:07 Permalink

OMG, sell everything!!!! It's all coming to an end!!! I'm so glad I've been following the "doom and gloom" indicators here on ZH for the past 6 or 7 years. I didn't lose my shirt...haven't made any money, unfortunately, but, those guys that HAVE been raking in the profits, well, they're gonna be sorry THIS time. ZH has been warning us for YEARS, about how the bottom is JUST about to fall out. Better to be safe than sorry. This time, the sky REALLY IS falling.

Salmo trutta Fri, 03/09/2018 - 09:15 Permalink

Big deal.  Interest is the price of loan-funds.  The price of money is the reciprocal of the price-level.

It’s quite simple. All economists are mentally retarded. Unbeknownst to most Fed watchers, N-gDp targeting leads to FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling? [Stagflation’s dilemma, viz., the FOMC’s policy mix]

The reason why the rate-of-change, RoC (first derivative f’), in the inflation indices accelerates (second derivative f”), relative to the RoC of R-gDp (where P*T is its inelastic proxy), is that the relative proportion of idle bank-held savings increases coterminous with higher interest rates on bank liabilities

Note: commercial bankers pay interest on their deposit liabilities, balances that they collectively already own. The elimination of Reg. Q ceilings for commercial banks was at the ABA’s behest (which makes all the DFIs less profitable while reducing *real* rates of interest for non-bank saver-holders).

This alteration in bank’s costs, destroys savings velocity, a subset of the velocity of circulation -- ultimately lowering aggregate monetary demand, AD (and exacerbating secular strangulation).  This drag and decay will cause the next Great Depression.

CRM114 Fri, 03/09/2018 - 09:31 Permalink

that the last time this happened, the US was already deep in recession

as it is now, from the average Joe's point of view. In fact, the US and Europe have never left recession since 2008.