Good Monday AM,

It’s May. Lots of data this week, which on top of the Fed meeting and announcement on Wednesday, has bonds yet again under pressure. The 10-yr note is at 3%. This has been the fastest sell off (rise in rates) on record. On top of the Fed meeting, where we expect a 50bps rate hike and a reduction in the balance sheet (likely to make room for the next round of easing where the Fed will be back to buying bonds and which will happen shortly after they slam the brakes on the economy this summer). The Q&A after the announcement is always more revealing, so we will see what Mr. Powell has to say on future tightening. Markets are already thinking of a 75bp rate hike in June. Friday brings the Jobs report which is the most important data point of the month. If nothing else it will be interesting and volatile this week.

I am including a few headline snippets from the WSJ to set the stage for what markets are looking at right now. The amount of debt as a percentage of GDP is staggering…

Fed Prepares Double-Barreled Tightening

To support financial markets and the economy during the pandemic, the Federal Reserve more than doubled its asset portfolio of mostly Treasury and mortgage securities to a mammoth $9 trillion. This Wednesday, officials are to announce plans on how they will shrink those holdings. Expect the process to be faster and potentially more disruptive to financial markets than last time.

The yield on the 10-year U.S. Treasury note logged its biggest monthly increase in more than a decade in April, lifted by mounting expectations for higher interest rates. Treasury yields are important across the economy because they set a floor on borrowing costs. As yields have risen this year, so have the interest rates that people pay on new mortgages and on credit-card debt.

Here are some early metrics on inflation.

Rampant inflation is helping reduce the weight of the world’s public debt relative to its economic output, a boon for governments that economists warn could easily backfire if inflation stays unchecked. Some highly indebted European countries—including Greece, Portugal and the U.K.—are on track to erase the additional debt raised to combat the Covid-19 pandemic as a share of gross domestic product over the next year or two, taking their debt-to-GDP ratios below 2019 levels, Tom Fairless reports.

The reason is that inflation, coupled with brisk economic growth, is turbocharging economic output measured in dollars, euros or pounds. While government borrowing costs are also rising, they remain relatively low, meaning public debt as a share of GDP—the main yardstick by which economists measure the sustainability of a country’s public debt—is falling in many places.

How bad it will get? The Italian economy could already fall into a technical recession as it is expected that GDP will contract for a second consecutive quarter in 2Q. The government has introduced measures intended to help the economy weather the current shock of energy inflation on households and businesses, but this is providing only partial compensation. Confidence in the manufacturing sector has stabilized in April, but supply chains show signs of worsening and consumer confidence fell further over the month. “The economic picture is unlikely to get any brighter over 2Q 2022…we suspect that 2Q might have another GDP contraction in store, marking the start of a technical recession,” he says.

Enough for today.

Please remain safe and healthy, make today great!