Hiking the US Fed funds rate a further .75 yesterday, now 3 to 3.25% (from 0 to .25% in March), Chair Powell acknowledged that unemployment will rise, adding: “Nonetheless, we’re committed to getting inflation back down to 2%.” Powell reiterated that his board plans to raise US base rates a further 1.25% (4.25 to 4.5%) by year-end.

The Fed’s GDP growth forecast was lowered to just .2% in 2022 and 1.2% in 2023 and well below the 2.5% US GDP growth capacity estimate–a whopping slack in resource utilization. This is the closest a central bank will ever come to acknowledging an incoming recession. 

The US dollar index (DXY) leapt 1% to a 20-year high above $111, and stock and commodity markets slumped, with every S&P 500 sector lower on the day.

The US 2 and 30-year Treasury yield curve inverted 58bps, the most since 2000, with short-term yields rising and long-term rates rolling over on the weakening economic outlook.

Word to the wise: historically, equity markets have not bottomed until after the Fed abandons its tightening plans and slashes rates again for several months, dropping short yields and re-steepening the yield curve.

If December 2022 ends this hiking cycle, followed by loosening efforts again in the first half of 2023, it could suggest a stock market bottom sometime in late 2023. Only time will tell.

The last six months of falling asset prices have been about rising interest rates (lower discounted cash flows), negative real wages and slowing consumption (sales). The following six will likely be focused on negative earnings trends and financial contagion, with credit strain and defaults spreading through highly levered corporations and households globally.

As central banks now break the asset bubbles they helped to form, the return of principal is back in vogue, and the yields for cash and the most secure bonds–the highest since 2007–offer an attractive harbour from capital implosion. This is when North American government bonds typically outperform.