Pro Perspectives 9/23/22

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September 23, 2022

We end the week with the warning signals of a meltdown.

Stocks retested the June lows today.  U.S. 10-year yields spiked up to 3.82%.

This comes following Wednesday's Fed meeting, which suggested, via the Fed's economic projections, that they are planning to ramp rates another 125 basis points into year end.

As we've discussed in recent days, that rate scenario would bury the economy into a deep recession.  It is also a threat to the solvency of global sovereign debt.

As we know, the rise in U.S. yields tends to pull global yields higher. 

With the spike in U.S. yields today, yields on the vulnerable Italian sovereign debt went to nine-year highs (to 4.36%).
Importantly, that's ABOVE the June highs — a level that triggered an emergency response from the ECB, where they designed a plan to become buyers of last resort of fragile sovereign debt in the euro zone (more QE).  This is a strategy intended to defend their vulnerable constituent countries in the euro zone from a sovereign debt default.
So with this move in rates, the ECB will likely be forced back into printing euros to finance debt and deficits in the euro zone.
That problem, comes with another problem.  When the rest of the world has exited QE and you're still printing, your currency will devalue. 
We've seen it with the yen. 
Today, we saw what may be an important day in the history of the euro (the most widely held currency in the world).  The euro traded to new 20-year lows – and now well under parity with the dollar.

A weak euro, like a weak yen, isn't unwelcome.  Weak, at a rapid pace (i.e. crash), however, tends to be accompanied by debt defaults.
This is all part of the fine line the Fed has been walking, in trying to tame inflation, without creating a bigger, more dangerous, and global, crisis. The markets are telling them, this recent guidance on the rate path has gone a step too far.  We may see some damage control from the Fed next week (some walking back).