June’s one month CPI increase was 0.2%, coming on the heels of May at 0.1%. The annual rates for May and June respectively are thus 1.2% and 2.5% respectively - significantly lower than the year on year rate would suggest. If we assume the true point in time rate is between 1.2 and 2.5%, then the economy has rapidly cooled.
The strongly inverted yield curve reflects this slowdown and predicts - with some degree of confidence - that the Fed will have to drop rates soon because the slowdown is leading us towards a recession. I find it interesting that the S&P is close to its height prior to the start of last year’s bear market even though the yield curve suggests extreme caution is warranted.
A recession would imply that the interest rate policy has worked. But it would also imply reduced corporate profits and growth, both of which feed into fundamental measures of equity value. This is a nerve wracking time to be invested in stocks.