CPI was up 9.1% y-o-y in June, the highest rate, as we all know by now, since 1981. Up 11.3% y-o-y, Producer Prices were also significantly above estimates. Retail Sales were stronger-than-expected, and there was even a decent pop in the Current Conditions component of the early-July confidence reading from the University of Michigan survey. Following last week’s strong payrolls report, data point to relatively resilient demand and pricing pressures. (Almost) Everything points to a second 75 bps hike at the FOMC’s July 27th meeting.

Yet 10-year Treasury yields dropped 16 bps this week to 2.92%, with yields now down about 56 bps from the June 14th peak. And with two-year yields up two bps this week (3.13%), the U.S. yield curve (2yr/10ry) ended the week inverted 20 bps. While conventional thinking points to imminent U.S. recession, it’s somewhat of a challenge to explain this week’s yield curve gyrations by domestic considerations. International developments make sense of it all.

Recall the Treasury curve inverted back at the end of March for the first time since the brief inversion in 2019 (and before that 2007). Not coincidently, the Chinese developer bond market was badly dislocating in March, as Country Garden, China’s largest developer, saw its yields surpass 30% (traded below 10% in February). Those Crisis Dynamics were quelled by a lengthy list of Beijing stimulus measures.