Hawkish Central Banks Melting Down Global Economy

Global central banks have irrationally reacted to an oil price shock with rate hikes, led by the ECB.  This action is contrary to conventional economic theory as oil price spikes weaken the economy and rate increases further weaken the economic growth but do nothing to address energy driven inflation.  That is why central bank inflation targets are based on core inflation not headline inflation.

The global bond melt down is led by the French 10-year which is down over a point today to 4.9% with the yield up 130bp over the last 6 months with France now having the highest yield in the Euro Zone.  France is in a fiscal crisis with debt to GDP forecasted to go above 121% next year.  If the ECB continues to make ill advised rate increases the Euro Zone is likely to implode. In the US, the real estate market was already in recession prior to rate hikes with residential and construction investment negative and that was prior to the 100bp increase in 30-year mortgage rates over the last 6 monthsl.

We are bullish on the US 10-year bond as we expect that the Fed will raise rates only one more time, as the dot plot implies, vs. the 4 increases priced into Fed Fund futures.  The US 10-year normally trades at 100 over the terminal Fed Funds rate so we expect the US 10-year to stabilize in the 5% area as weak housing data and low CPI Core prints putting  the Fed on hold.  We also expect the ECB to go on hold and to potentially increase its monetary base to defend the crashing French bond market.