Unsurprisingly, the market remains intently focused on inflation as the key driver of Fed policy and rate volatility. This week, the biggest inflation report combined with more UK market drama to push rates to another 20yr high. The UK doesn’t typically factor into our assessment of market movement in the US, but the past 3 weeks have been a notable exception. The following chart shows how much bigger the move has been overseas. Viewed in this light, US rates look almost resilient. Resilience may have been in better supply were it not for this week’s much-anticipated release of the Consumer Price Index (CPI), the most influential monthly report on inflation and, indeed, the most influential of all the economic reports given the current preoccupation with the I-word. Rates were near their best levels of the week before CPI, but quickly spiked in its wake. CPI caused rates to spike because it showed inflation was even higher than the already-high expectations. The more important “core” CPI made a particularly troubling move back up to the highest levels in decades. Bonds/rates don’t like inflation anyway, but they really don’t like it in 2022 when inflation is high enough to fuel the most aggressive Fed rate hike campaign since the 80s. This report alone was responsible for bumping the Fed’s rate hike outlook to nearly 5.0% by the middle of next year. It’s not just rates that suffer from Fed rate hikes. Stocks also tend to take a hit when the Fed enacts tougher policies or when economic data looks like it will add to the Fed’s austerity. This combination of “suggestion” from the data and “confirmation” from the Fed is the thesis for 2022. Massive losses in stocks and bonds are the conclusions.