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).