The monetary policy tightening expectations significantly increased last week in response to the highest CPI reading since 1981 and the new peak in this cycle. However, the core CPI continues to decrease, and the longer-term inflation expectations barely moved. The stock market sold-off back to the near 20% drawdown level in response to the rising monetary policy expectations.

However, given the muted reaction in inflation expectations, it is likely that the market overreacted to the CPI. The last week sell-off is still part of the liquidity risk – coming from the lack of liquidity in short term bonds. The probability of an imminent recession is still low, while the credit risk actually decreased. Next week is the Fed meeting – which will provide more clarity on the monetary policy and reduce the liquidity risk.