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Turbulence Ahead

Turbulence ahead

After months of fretting about soaring inflation, markets are now fully in recession-fear mode. Yield curves are flattening, credit spreads are widening, and equities are slumping—traditional recession alerts. Meanwhile, captains of industry and finance are warning of impending “hurricanes,” “super bad feelings”—and possibly even worse.

The proximate cause of the latest market selloffs was the May US Consumer Price Index report, which came in hotter than expected in both headline and core terms. It also presented an unnerving picture of broadening price pressures across the economy. Investors responded by ratcheting up expectations for Federal Reserve (Fed) rate hikes, and the Fed responded by increasing rates 0.75% Wednesday, with another potential 0.75% in July and more increases beyond that.

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