Like it or Not USA and its economic/monetary direction is driving what happens to world markets today. Ignorance is bliss if you do not believe so.
Today's piece tries to put together some of the most important charts that I came across recently and connects the dots of where we are in the cycle.

Economic Winds of Change

A lot has happened since the yield curve inverted, predicting a recession in six months. Now what that really means is not that the recession will arrive in six months, it means that things may get bad enough that it gets recognized. At that point in time, the FED will change policy and start cutting rates, and the yield curve steepens again. Some of the biggest crashes occur around this time in markets, as the markets recognize that a recession is here, and money starts to move out of stocks into bonds in a risk-off trade or a flight to safety. This is why the bond market bottoms before the stock market. But we are not there yet. The bond market is still falling, and yields rising.

This time is different, a little. By this time, rate hikes are behind us. The reason it did not happen this time is that inflation was far more out of control. When Oil hit 144$ in 2008, inflation was not this big a problem. India raised rates once, but the US did nothing. At this point, we are still on the hiking cycle. The chart below shows how PPI has raced far higher than CPI as producers raced to pass on costs.

The result of rising prices often is re-stocking, and we see some sense of that below, with increasing inventories. Preponement of demand can be one of the side effects of inflation both at the consumer and producer levels. This is why containing inflation expectations becomes essential. It results in consumer behavior toward consumption. If we choose to buy more today, then we only create more shortages.

This unusual mix between a high rate of inflation and a low rate of unemployment and the resulting consumer behavior has made it difficult for the FED to cut rates quickly even as the underlying growth momentum slows. Higher for longer has become the mandate.

So as growth slows, raising wages might not be possible and the cost of living, in general, is going to tighten up.

On the other hand, the high-interest rates and QT are simultaneously hurting where it hurts. Liquidity. Every time we have been here below 20 in the past there has been a financial crisis, and that has been followed by a flood of liquidity, in that order. Now we should be looking out for the first thing, the financial crisis.

Rohit Srivastava
The Truth About the Markets