The post-pandemic inflation surge clearly persisted too long for central banks to ignore. But investors skeptical of some multiyear regime change or paradigm shift still feel emboldened.
After a bruising start to the year, world markets caught a break in July.
Some relief was perhaps due after Ukraine-related energy and food price shocks in February compounded a post-pandemic inflation spike and forced months of dramatic re-pricing of interest rate, bond and stock markets.
The sort of synchronized monetary policy tightening investors braced for — described by the International Monetary Fund last week as "historically unprecedented" — is now well underway and recession fears mount as economic forecasts are slashed.
Rates markets are already peering over the hump and despite all the hawkishness from central banks feel the worst of the episode may have passed — even if visibility is limited for policymakers and investors alike.
Futures markets now see U.S. Federal Reserve policy rates peaking by the turn of the year at about 3.35% — about 1 percentage point above current rates, but also some 65 basis points below where they saw the so-called "terminal rate" in mid-June and now occurring three months earlier than assumed back then.
As significantly, they pencil in about half a point of rate cuts from there through 2023.
Exaggerated a bit by last week's U.S.-China tensions over Taiwan, 10-year U.S. Treasury yields dropped almost a full percentage point in just six weeks to as low as 2.51% while inflation-adjusted yields fell back to zero. The inversion of the 2-10-year yield curve, often cited as the most accurate harbinger of recession, deepened to the most since the dot.com recession at the turn of the century.
And significantly, market inflation expectations captured in both five- and 10-year index-linked bonds are both now solidly back below 3%. What's more, Brent crude oil prices dipped back below $100 per barrel last week. Wheat futures have returned to pre-Ukraine invasion levels as ships resumed deliveries of Ukrainian grain.
Hardy fans of the much-lampooned "transitory" inflation thesis feel the latest twist just underlines how the post-pandemic inflation surge remains primarily a supply shock that will ultimately normalize.
The problem for anyone trying to work this out is that even if you believe this bout of inflation is just down to temporary supply distortions, unpredictable political calculations make it impossible to time a resolution with any surety.
The energy, food and supply chain skews related to international tensions mean guesswork more than conviction will likely dominate the rest of the year.
Dolan is editor at large for Reuters.