US Stagflation Risk Scenarios and Probabilities: Week of 15 Sep 2025

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 Scenario Probabilities


Modal tilt remains Recession-first, driven by labor softness and falling real yields; breakevens remain anchored.

Executive Summary
• Fed watch: Markets price a cut this week; front-end yields fell, steepening 2s10s to 0.49 pp.
• Disinflation: CPI 2.94% headline / 3.11% core; expectations (5y5y) 2.3%.
• Real rates: 10Y TIPS near 1.67% — easing financial conditions vs recent highs.
• Labor: NFP 22.0K; unemployment 4.3%; wages 3.7% YoY.
• Implication: Recession-first remains the modal scenario; watch revisions, claims, and credit for confirmation.

Inflation: CPI and Core CPI

Headline CPI is running at 2.94% and Core CPI at 3.11%. Core remains stickier than headline, but both continue to drift lower versus prior peaks, consistent with disinflation. Fresh CPI release reinforces the case for a Fed cut this week if labor softness persists.

Treasury Curve: 2s10s Spread
The 2s10s spread sits at 0.49 percentage points. The recent steepening has been driven primarily by front-end rate declines as markets price earlier/larger Fed cuts. This is consistent with growth concerns rather than a renewed inflation impulse.

Real Rates: TIPS 5Y and 10Y
10Y TIPS real yields are around 1.67%. Falling real yields reflect easier policy expectations and softer growth momentum; taken with a steeper curve, this points to a recession-first tilt rather than stagflation by itself.

Inflation Expectations: 5y5y
Long-run inflation expectations (5y5y proxy) are about 2.3%. Anchored expectations remain compatible with disinflation progress and a near-term policy easing cycle.

Credit: High-Yield OAS
High-yield OAS near 2.78% suggests financial conditions are not severely stressed. Any widening from here would strengthen the recession-first case; tightening would support soft-landing risk assets.

Payrolls Module (2021–present)

Wage Pulse (AHE YoY)

Wage Pulse: AHE YoY at 3.7% (2021+ view). Moderate wage growth reduces stagflation tail risk and supports a gradual disinflation narrative.

Hiring Pulse (NFP MoM)
Hiring Pulse: Latest NFP change at 22.0K (2021+ view). This is below trend and, alongside a {latest_vals.get('Unemployment')}% unemployment rate, adds weight to a recession-first tilt.











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