Rates as of 0630 GMT

Market Recap

Stock markets continue to lead as Mondays bounce proved shortlived. There wasnt necessarily any particular trigger for yesterdays selloff, just the entire panoply of risks the war in Ukraine coupled with the COVID19 lockdown in China, which will only exacerbate the extraordinarily high inflation and force central banks to tighten so far as to cause a recession.

Some commentators even blamed a research report from Deutsche Bank that argued there will be a recession by the end of 2023. DB is the first major investment bank to forecast a recession. Others as well as the Fed expect the fabled soft landing, i.e. a smooth transition into a period of slower growth and lower inflation. Their view the Fed is behind the curve in a manner unseen in a generation, inflation is going to prove a lot stickier than expected, the Fed will have to raise rates to 56, and monetary tightening will push the US economy into a significant recession, with unemployment ultimately rising several percentage points.

So far the market disagrees, but these forecasts only go out for the next 12 months. Who knows what will happen by December 2023?

The market sees the Fed starting to cut rates at the end of 2024 so presumably investors think either inflation will be under control by then or theres going to be a recession. In any case, DBs forecast of a fed funds rate at 56 is wildly out of line with the market. Not impossible by any means, just not what the market…