ALL THINGS BIG AND SMALL 2.0

  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...

 Scenario Probabilities Executive Summary There is now a higher risk of a Recession-first Stagflation. The labor-market data from BLS was the dominant reason the model tilted more toward Recession-first this week, with weak hiring and a higher unemployment rate outweighing the mitigating effect of moderating wage growth.  Uncertainty continues to fuel the rise in the 30-year bond yield.  2-year yields fall faster than 10 yr yields on increased Fed-cut expectations amid growth weakness thus maintaining the momentum in the rise of 2y-10 yield spread. Falling TIPS 5y and 10y real yields typically reflect softer growth and/or easier policy expectations. General consensus in the markets lean towards a 25 bps rate cut by the Fed at its Sep 16-17 meeting, with some analysts even expecting a 50 bps cut. However, inflation risks persist due to a weak USD and exacerbated by wide ranging tariffs on imports the prices of which are ultimately borne by US consumers. What changed s...

 Scenario Probabilities *My heartfelt thanks to EODHD.com for helping me with financial markets historical data. A truly innovative data source company.  They have data on Equities, Indices, ETFs, Forex, Crypto and cover more than 60 Exchanges worldwide. Check them out.      EXECUTIVE SUMMARY For background reading on model, inputs and methodology please read https://ngtiankhean.blogspot.com/2025/08/usa-stagflation-risk-dashboard-11-aug.html  Main takeaway for this week: The picture is mixed, very noisy, contradictory and confusing.  All scenarios almost equally likely Stay away. Wait till a a clearer picture merges.  What changed since last week • Inflation compensation: 10Y breakeven 0.0 bps to 2.41 (%), 5Y -2.0 bps to 2.47 (%). • Real rates: 10Y TIPS 0.0 bps to 1.81 (%), 5Y TIPS +1.0 bps to 1.2 (%). • Curve: 2s10s changed -5.0 bps to 0.6 (% points). • Credit risk: HY OAS -3.0 bps to 2.75 (%). • CPI: No new monthly print since the...

Announcement: New Payroll Inputs for Stagflation Risk Dashboard from 1 Sep 2025 Let’s refresh our memory on the   current inputs of our stagflation risk model before we talk about the new Payroll input. 2s10s Yield Curve Spread What it is: The 2s & 10s yield spread refers to the difference in yields between the 2-year and 10-year U.S. Treasury bonds. It is calculated by subtracting the yield of the 2-year bond from the yield of the 10-year bond. Why it matters:  A yield curve inverts when long-term interest rates drop below short-term rates, indicating that investors are moving money away from short-term bonds and into long-term ones. This suggests that the market as a whole is becoming more pessimistic about the economic prospects for the near future. Breakeven Inflation and 5y5y Forward with CPI What it is: A simple approximation of expected inflation 5–10 years ahead using 2 × (10Y breakeven) − (5Y breakeven). Why it matters: A measure of long-run inf...

  Takeaway: Probability mix updated weekly using breakevens, real yields, the curve and HY OAS. Week over week: 10Y breakeven +3.0 bps, 10Y real yield -2.0 bps, 2s10s curve change -3.0 bps, HY OAS +7.0 bps. EXECUTIVE SUMMARY What changed since last week. Minor changes since last week, so charts will look about the same • Inflation compensation: 10Y breakeven +3.0 bps to 2.41 (%), 5Y +6.0 bps to 2.48. • Real rates: 10Y TIPS -2.0 bps to 1.94 (%), 5Y TIPS -2.0 bps to 1.42 (%). • Curve: 2s10s changed -3.0 bps to 0.54 (% points). • Credit risk: HY OAS +7.0 bps to 2.95 (%). • CPI: No new monthly print since the prior report; CPI panel unchanged week over week by design. Implications • 5y5y Forward slightly higher breakevens with softer real yields tilt mildly inflation-first versus last week, but magnitudes are small. • 2s10s Yield Curve move is modest; watch for re-steepening led by long-end selloff paired with firm breakevens as a stagflation signal. • HY spread widen...

  The probabilties above were calculated via heuristic allocation of weights to the Indicaors below and transformed to probabilities [0,1] with a SoftMax function. Introduction The U.S. economy is now in a state of flux and generally directionless due to the uncertainty caused by the current Administration’s on-off trade and political policies. However, many economists are of the opinion that a period of stagflation lies ahead i.e. a period of inflationary conditions coexisting with a period of recessionary conditions.   There are 3 possible scenarios of a Stagflation economic environment. as detailed below. My US Stagflation Risk Dashboard gives the probabilities for each scenario and is updated each week based on the latest data available. The 3 Possible Scenarios of a stagflation economic environment. 1.        Adverse supply shock can cause both at once A negative supply shock (oil/energy spike, geopolitical disruption, widesp...

  Many Economists see a period of both Inflation as well as Recession for the US economy in the months ahead- two scenarios at opposite ends of the spectrum of possibilities for an economy. This is a situation which they call Stagflation- a stagnant but also inflationary economy.  In this post we explain why, how Stagflation happens and the sequence of events. The flow chart above together with the notes below explains how the US Administration’s trade war tariffs can lead to stagflation:  • The process starts at the top with the implementation of high tariffs (Tariff Policy). • This leads to higher import costs, which in turn causes higher prices for goods—resulting in inflation. • As prices rise, consumers cut back on spending, which reduces corporate earnings. • Lower earnings force companies to lay off workers, increasing unemployment. • The combination of reduced spending and higher unemployment leads to a recession or stagnation. • At the bottom, ...