To The Moon

Last night, U.S. inflation beat expectations by a wide margin, surging to 7.5, the highest since 1980. The two-year treasury soared to 1.6, the last time a similar one-day gain was seen in 2009, thirteen years ago.

Statistically, this is an 8x variance event that occurs about once every 3 billion years. Earlier, I hinted here that the next few months will witness a series of epic stats.

In fact, last Friday, because the European Central Bank was more hawkish than expected, the one-year euro forward swap contract has soared, with a single-day increase of six times the variance event. At the time, German Bunds had a similar one-day gain.

The epic price swings in these bond markets have already hinted at the risks facing Treasuries this week. While these multi-billion-year figures are statistically staggering, I've given advance warning here of the prospect of soaring bond yields. Last night, the yield on the 10-year U.S. Treasury bond rose to 2.06, which is basically in line with the target of 2.16 predicted by my mid-cycle model. When predictive analytics focus on extreme events, extreme events appear to be less extreme. Often, the hypertrophy of the tail exceeds the perception of ordinary people.

Following the release of the inflation data, Bullard said it was "shocking" and supported a massive one-point rate hike in July. If so, this is definitely not what the market expected. Currently, the yield curve implies about a 70% probability of a 50-point rate hike in March, which has risen sharply from expectations a few weeks ago, but still does not factor in a 100-point rate hike. US stocks fell in response.

However, this is not the worst case. Historically, before the Fed raised interest rates, the US bond yield curve fell by an average of 40 points, and after the rate hike, it fell by 70 points; currently, the yield curve has fallen by 100 points, and there is only about 50 points left to invert.

In other words, the Fed is now raising rates with 50 points left of the yield curve, which historically has led to a 70 point decline in the yield curve - if history repeats, the Fed will raise rates this time. The interest-to-yield inversion cannot stop either. This is what I have repeatedly emphasized before.

The biggest macro risk in the world is that the Fed has to raise interest rates due to inflationary pressure when the US economic cycle has peaked; at the same time, the slowdown of China's economic cycle has not yet ended, and it is difficult for global growth to stand alone. branch.

The extent to which the Fed is now deviating from inflation in monetary policy is unprecedented in history. Last night's U.S. inflation data and Fed Bullard's "100-point rate hike" remarks indicated that the Fed's rate hike path was full of surprises.

The last time the Fed raised rates more than expected - was in February 2000.