Morning Notes — Leading Indicators

Copper and steel prices typically lead the way on inflation and they’re already negative YoY.  We should begin to see the data start to roll over next month and continue rolling over for the next ~6 months.  We saw the initial market signs of peak inflation three weeks ago in 10-year breakeven yields, with last week’s break below 280bps unlocking the cross market dysfunction that led to extreme bond market volatility. Bond market volatility quickly made its way to equities, which priced in a ~70% probability for a recession last week.  To put this in perspective, the recession probability priced into High Yield credit markets last week was only ~30%. Credit markets usually lead others in pricing for a recession. If a recession was going to materialize, you’d likely see it first in credit card and mortgage delinquencies.  Sub-prime delinquencies have recently emerged in bank filings, but remain well below pre-pandemic/normal levels.