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DoubleLine Podcasts

MMM Episode 69: Hot, Sticky Inflation; Flattening Treasury Curve; Speculation on Stagflation

In their review (1:49) of the carnage in the equity and bond markets June 6-10, Jeff Mayberry and Samuel Lau zero in (3:50) on “a big compression of the differential” between the yields of the two- and 10-year Treasury notes. As of Friday’s close, the 10-year yielded only 9 basis points more than the two-year. Not yet an inversion, so not enough to put Jeff and Sam on recession watch, but thin enough to put them on “the pre-watch to the watch.” In their discussion of the week’s macro news (11:32), the showstopper of course was the CPI and Core CPI reports for May (12:42), both showing accelerating inflation. While one economist suggested the negative news was tempered by the fact that inflation was limited to energy and energy-linked inputs (14:18), Samuel Lau pointed out that the rising cost of shelter is “already a big contributor to that Core CPI print” and “is picking up speed.”

For their Topic of the Week (20:12), the podcast cohosts discussed the phenomenon of stagflation, which is the prevalence of high inflation amid a sluggish economy. They found similarities between the present environment and the economic context of the 1970s-early 80s when the U.S. last experienced stagflation. Turning to the economic calendar (23:38) for the week of June 13, the cohosts concentrated on the Federal Open Market Committee meeting, scheduled for Wednesday June 15. Jeff Mayberry noted the federal funds futures market on Friday June 10 increased the probability of a 75-basis point hike in the fed funds to 27%, up from 9% as of the previous day’s close. He doubts, however, that Friday’s inflation report will be enough to “spook the Fed” into a 75-basis point hike and still expects a 50-basis point move by the FOMC.

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