Week in Review: June 10, 2022

Markets ended the week lower pressured by surging global inflation and attendant concerns about monetary policy. In Europe, the European Central Bank (ECB) indicated it will increase rates by 0.25% in July (its first rate hike since 2011) and again in September, perhaps by as much as 0.50%. With inflation running at 8.1%, the bank has few other options. Expectations for rising rates helped push the German 10-Year yield to 1.52%, its highest level since 2014.  A year ago, it stood at -0.23%.  Other central banks including the Reserve Banks of India and Australia both raised rates by 0.50%, highlighting the global nature of the fight against higher inflation.

In the U.S., a reacceleration of inflation in May ended any hopes that the Federal Reserve might consider pausing its rate hikes at its September meeting.  It also pushed market expectations for a 0.75% rate hike in July to over 50%. Markets now expect the Fed Funds rate to end 2022 at 3.25-3.50%, up 0.50% from a week ago.

The changing expectations were reflected in the Treasury yield curve which saw the short-end of the curve, measured by the 2-Year Treasury yield, rising 0.41%, to end the week at 3.07%. Expectations for a more aggressive Fed, and concerns of a Fed-induced recession weighed on the longer end of the curve which saw the 10-Year Treasury yield increase by only 0.22%, to 3.16%. That in turn resulted in the 2-10 spread narrowing to just 0.09%, its lowest reading since early April when the spread briefly turned negative. A negative 2-10 spread, known as an inverted yield curve, is considered a harbinger of recession.