Ole, Ole, Ole-Ole!

Inflation is still feeling hot, hot, hot! 

To be serious, we have a situation on our hands which history suggests is quite dangerous. The disconnect in the bond market between smart, seasoned traders who believe rates are either about to plunge and/or simply "cannot" go much higher from here is likely a function of the forty year bull market Treasuries have enjoyed. So, of course you will see market players of all calibers become conditioning like a Pavlovian dog for recency bias. 

But with sticky higher wage growth and rent prices superseding the summer drop in gasoline prices, not to mention sticky higher grocery prices, The Fed is highly unlikely to pivot to a dovish stance anytime soon. Furthermore, I would not rule out the chance at a 100 basis point rate hike next week. 

The critical issues, however, is that rates on the 10-Year Note, seen on the monthly chart index, below, look to be clearing prior decade-long resistance. With so many savvy bond market traders doubting this move, the risk of a bond market crash is higher than people think, meaning the chart below would spike up to 4-5% or higher (40-50 or higher on this chart) as those seasoned bond traders finally come-to and admit they are erroneously fighting the tape, closing their positions in a hurry.

Markets have an extensive history of ruthlessly correcting their mistakes one they realize just how incorrect they have been. In this case, both the 10-Year Note and growth stocks in equities (which abhor higher rates) have been complacently assuming of late that inflation was on the mend and that a Fed pivot would come sometime fairly soon.

One again, the great irony is that the pivot only has a realistic chance of coming after a crash, not before it, which means a high stakes game of musical chairs is here and some big players are likely going to grab a seat (by selling) sooner than later.