Thread
The majority of the move in equities this year has been driven by the change in the RFR. That is now changing. Equities are pricing in a real earnings recession now, breaking the correlation with yields.
Many pundits will soon claim that risk parity is back, time to pile into bonds! The trouble is that it discards the very real possibility that inflation remains higher for longer. Yes, inflation has undoubtedly peaked. But that doesn't mean it can't remain stubbornly high.
The market is setting itself up for another surprise CPI print that flushes equities lower and shoots yields higher. Sure, inflation could dive in a straight line back to 2% over the next 12 months. The probability of this, however, is quite low.
This is the part of the cycle where liquidity truly drains and things start breaking. Remember, even if a recession is 2-3 quarters out - the market will start pricing it now. Add the double-whammy of a surprise CPI print and things get nasty quickly
Before you start buying into narratives, understand what is driving them. This is a very difficult environment, tread carefully
