• Yield curve inversion deepens, heralding imminent recession
• Fed minutes show commitment to fight inflation but unclear on pace of rate hikes
• European bond yields rise as ECB faces rising inflation

The inverted yield curve on US Treasuries—which deepened on Monday and is an incontrovertible fact—is vying for investor attention with speculation about what Federal Reserve Chairman Jerome Powell will say at the Jackson Hole symposium on Friday.

The gap between yields on the two-year and 10-year Treasury notes reached more than a minus 30 basis points at one point on Monday, indicating a big recession is looming or is already upon us.

Speculation about how hawkish Powell will be in his speech is just speculation. Investors took the decline in the consumer price index (CPI) earlier this month as a sign that inflation had peaked as it registered 8.5% higher on the year in July, compared to 9.1% in June.

The big question is whether the Federal Open Market Committee will go ahead with another 75 basis point (bps) hike in September to tame inflation or whether the prospect of recession will stay its hand.

Kansas City Fed chief Esther George, who will host the Jackson Hole symposium, said the pace of rate increases is under debate by policymakers, as she left the door open for a smaller 50 bps increase in September.

Her colleague across the state, St. Louis Fed President James Bullard, however, maintained his hawkish stance, calling for a 75 bps increase in September, following similarly large hikes in June and July.

“I don’t really see why you want to drag out interest rate increases into next year,” Bullard said in an interview with the Wall Street Journal.

Both George and Bullard are voting members of the FOMC this year. Two non-voters, San Francisco’s Mary Daly and Minneapolis’s Neel Kashkari, also weighed in, with Daly saying she was open to a larger or smaller increase, and Kashkari calling the need to get inflation down urgent.

The minutes of the July meeting, released last week, were clear on the commitment of policymakers to slow inflation, but ambiguous about the pace of rate increases. Members felt, before the release of CPI data, that there was little sign inflation pressures were easing.

“Participants emphasized that a slowing in aggregate demand would play an important role in reducing inflation pressures,” the minutes said, which seems clear enough.

Less clear was the statement that “it would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation.”

Stocks continued to rise last week as investors opted for the more optimistic interpretation of the minutes, but declined on Friday and Monday amid talk of a bear-market trap.

European bond yields tell a less ambiguous story as inflation continues to rise and only the prospect of recession seems likely to check further monetary tightening by the European Central Bank.

Yield on Germany’s benchmark 10-year bond was up more than 4 bps to 1.30% as Deutsche Bank economists forecast it reaching 1.75% over the next few months as the ECB hikes rates.

Italy’s 10-year bond yield, meanwhile, rose 8 bps, widening the spread with the German bonds at one point to 229 bps. The prospect of a right-wing alliance winning control of the government in the September 25 snap election and defying European Union limits on deficits has led to weakness in Italian bonds.

Yields on UK gilts also rose sharply in Monday trading, tacking on 15 bps from lows to close at nearly 2.53%. Citigroup forecast that UK inflation could top 18% by January amid exploding energy costs.

In general, the European energy situation continues to worsen as Russia warned that it would halt natural gas deliveries via the Nord Stream 1 pipeline for three days at the end of August.

Isabel Schnabel, a German member of the ECB executive board, told Reuters last week that there was no sign that the central bank’s surprise 50 bps rate hike in July has halted rising inflation, as the governing council debates whether to hike its policy rates another 50 bps in September or go to 25 bps.