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Welcome to The Weekly Fix, the newsletter that’s been known to get fast and loose with its covenants. I’m cross-asset reporter Katie Greifeld.

Don’t Even Say It

A somewhat taboo phrase has started to creep into the market narrative. Inflation expectations are sky-high, and the data are starting to deliver. Meanwhile, ‘peak growth’ warnings are starting to ring, and have only grown louder after last week’s shockingly large U.S. payrolls miss. You guessed it: Stagflation. 

Before you angrily close this newsletter, let me explain myself. Obviously stagflation is a loaded word: it evokes images of mile-long lines at gas stations in the 1970s, double-digit CPI and painfully high unemployment rates. Recently, the term’s been co-opted by the Republican Party to criticize the Biden’s administration’s multi-trillion dollar spending proposals. 

This is not the 1970s, and it would be wrong to describe what’s happening in the economy right now as stagflationary, as Grant Thornton LLP’s chief economist Diane Swonk laid out in a masterful Twitter thread last week. But there are some interesting dynamics at play in the bond market that are worth examining. 

Five-year breakeven rates jumped to the highest level since 2005 this week, while five-year real rates — which strip out the effects of inflation — sank to all-time lows. That gap between those two gauges has never been greater. Other measures tell a similar, if less dramatic story: The rate on the five-year, five-year forward swap contract is at the highest since 2017.

Much of the growing anxiety around inflation can be blamed on the severe and distinct choke points in global supply chains, with everything from semiconductor chips to corn in high demand. It feels like everything physical is on fire right now, and that’s a problem for companies contending with surging input costs — if you can’t build it, you can’t sell it. Which, in turn, is weighing on growth expectations. 

“Could this inflation scare turn into a growth scare? One way to connect the dots is to look at the supply chain challenges,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. “How persistent are these supply chain constraints going to be, how soon can these bottlenecks be worked out, in order for suppliers to come back online and prevent us from having a challenge to growth?”

A bevy of survey-based data highlight the crunch, perhaps none as clearly as the Institute for Supply Management manufacturing numbers. In April, the U.S. factory backlog orders index jumped to a record 68.2, while an index of customer inventories hit an all-time low for the data series…

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