As long as interest rates remain low, higher inflation – transitory or not – doesn’t concern the Fed much. Given the mountains of debt we’ve accumulated, any breakout in rates is quite concerning. So, investors are understandably nervous when they see the 10Y threaten to break out of a consolidation pattern.
The Fed’s dilemma is that oil, the initial cause of the sharp rise in inflation, was also a significant cause of stocks rebounding.
Algos love the reflation trade – to a point. When rates get too high, it typically means that oil has risen too high. The Fed needs both inflation and oil prices to level off or reverse here, which is why the market is correctly very nervous.
Some might even remember October 2018 [see: Suddenly Interest Rates Matter] when rates threatened to break out of a very long term channel. They could only be corralled by a 45% decline in oil and the subsequent 21% decline in SPX.
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