Hey There Income Hunter,

Western economies are expected to experience their sharpest decline in more than 80 years after the World Bank slashed global growth forecasts to below 3%.

This is truly historic. 

Usually inflation at least gives an impression of a growing economy. But this time around, as inflation rises, growth is slowing even faster. 

This is creating potential for a new crisis because the weakening economy means policymakers need to stimulate more to keep the US and Western sovereign debt sustainable.

However, with inflation still high, Western central banks risk runaway inflation that would hurt the bond market more than help it. 

And this could turn into a western shootout at the old corral.

Today, we’ll take a look at who may be the first to go into recession and the signposts to follow.

Western Central Banks Are Trapped

You know things have gotten bad when stimulating the economy could actually backfire by fueling higher inflation, which could hurt the bond market.

At the same time, the weakening economy means that not stimulating more may also threaten the bond market via potential credit losses.

The European Central Bank, Bank of Japan and Fed are surely trapped.

This is not someday and it is not in 6-months from now.

This is a NOW event. 

Watch the Bond Markets for Signs of Default

Look at the move down in the iShares HighYield Corporate Bond ETF (HYG) both today and year-to-date …

The Weekly Leading Index Growth Rate (%). Notice how steeply the global growth rate has declined YoY. That is just since April … 

Finally, keep an eye on the Italian government and US government 10-year rates. Debts of both countries are rising very sharply … Watch for the narrative to shift to a possible default unless the ECB and Fed start printing money to remain solvent as tax revenues decline under a shrinking economy. 

What this means in plain English is that the Fed and ECB are soon going to have to grow their balance sheets – even into an inflation spike, to keep their sovereign government bonds nominally solvent. 

In the meantime, as long as the Fed and ECB continue to pretend this is not the case, the USD will likely rise and most everything else will fall, similar to Monday.

The question is does Jerome Powell recognize the stress? Does he dare to pull back the hawkishness on Wednesday? 

Bring It Home

Powell did flinch during the March FOMC meeting when the markets were similarly depressed and sentiment was at extreme bearishess.

The result was an 11% rally in a couple of weeks. The 3,700 S&P 500 level is a good level to establish a bullish strategy in SPX head into the Fed and Friday’s quarterly option expiration … 

Here’s a secret – I’m going live for a flash event tomorrow at 11 a.m. ET ahead of the Fed meeting. You’re the first to know … and this link gets you directly into the room.

Until then …

Live and Trade With Passion My Friend,

Griff