March 28, 2023

On the Eve of November FOMC

Figure 3: VIX (blue, left scale), and 7 day centered moving average of EPU (red, ideal scale). Source: CBOE through FRED,

Figure 2: Five year inflation breakeven calculated as 5 year Treasury yield minus 5 year TIPS yield (blue), 5 year breakeven changed by inflation threat premium and liquidity premium per DKW (red), both in %. Source: FRB through FRED, Treasury, KWW following Damico, Kim and Wei (DKW) accessed 11/2, and authors calculations.
That being said, the approximated inflation expectations representing premia has been trending upward through the last date offered, end-September.
Lastly, the VIX has cycled up and down while the EPU has trended downward since the month following the expanded Russian invasion.

Anticipated economic activity, medium term market based inflation expectations, and risk/uncertainty procedures.

What about market based inflation expectations? At the five year horizon, expectations presumed directly from Treasury-TIPS spread is back up to levels at end-August, however still far listed below March 2022 peaks.

Figure 1: Ten year-three month Treasury spread (blue), ten year-two year spread (red), both in %. Source: FRB via FRED, Treasury, and authors computations.
Inversion of both term spreads is a quite sure harbinger of a recession in the next year. Powells favored term spread– 3 month spread relative to 3 month forward 18 months– is also coming close to inversion.

Source: Reynolds, Geldhill, Bloomberg, 11/1/2022.
Economists appear pretty convinced of impending economic crisis also (across nations). From Torsten Slok (11/1/2022):.

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