Everyone expects inflation to keep rising and the housing market is begging for mercy but sure let's talk about Chinese hybrids · Daily Briefing

In 30 seconds: New York Fed 1-year inflation expectations rose to 3.9%, while gasoline hit multi-year October highs, world food prices reached a four-year peak, and ongoing Gulf shipping attacks kept oil markets volatile. The 30-year mortgage rate jumped to 7.49%, a three-year high, driving mortgage applications down sharply and raising questions about Fed rate policy's impact on borrowers. The EU is preparing safeguard cases and tariff rate quotas against surging Chinese hybrid and EV imports after China rejected voluntary export restrictions, pushing the two sides toward a trade conflict. UK 30-year gilt yields hit 28-year highs above 6% while French spreads widen, complicating budget formulation and raising fears of fiscal instability across Europe.

The New York Fed 1-year-ahead inflation expectations survey for September came in at 3.90%, up 0.3pt on the month and the highest since May of 2023. The prior reading was 3.58%. New York Fed median 3-year inflation expectations: 3.25%. The short-term jump is not mysterious. The national average gasoline price hit $4.41 on October 1, the highest in any October over the past five years, and well above October 2022. Meanwhile the FAO Food and Agriculture Organization Price Index climbed 5.8% year over year in September. Prices for cereals, vegetable oils and sugars increased, though meat prices decreased, which is nice if your diet is exclusively steak. The net result: CPI inflation is now rising more than wages for the average American worker. Energy markets remain hostage to geography. UKMTO reported another attack on a ship in the Gulf, with 13 attacks logged over the past week. Brent crude slipped back below $100, but the head of the International Energy Agency said member countries stand ready to release strategic reserves if necessary, prioritizing diesel given tight supplies. That is reassuring in the way a fire extinguisher next to a lit match is reassuring. The supply side is not helping either. The New York Fed Global Supply Chain Pressure Index ticked up to 1.28 in September from a prior reading revised up to 1.20 from an original 1.06. August imports of industrial supplies (petroleum, crude oil, chemicals, metals) surged $9.1 billion, or 17%, from the previous month, while the overall trade deficit stood at $105.6 billion in August. You import more expensive stuff, you pay more for it, and then you tell the Fed survey you expect prices to keep rising. The model works.

If you are shopping for a house right now, the market would like you to know it does not care about your feelings. The damage to demand is exactly what you would expect, which is to say, severe. Zoom out and the picture gets worse. These are not soft-patch numbers. The Fed, meanwhile, finds itself in an awkward spot. You can see the logic: markets are demanding rate hikes, most participants assessed another increase would likely be appropriate by year end, and the models say tighten further. You can also see the problem, which is that the people absorbing the tightening are not evenly distributed across the economy. They are concentrated among anyone unlucky enough to need a new mortgage right now.

The EU is preparing a series of safeguards cases to address what it characterizes as a second China shock — import surges that are, by the trade data, clearly disrupting parts of the European economy. The immediate flashpoint is hybrid and plug-in hybrid cars. China has rejected an EU request to voluntarily restrict its surging exports of hybrid cars to the bloc as the two sides enter last-ditch talks to avert a trade conflict. The numbers explain the urgency. Tariff rate quotas — which allow some Chinese imports into the market before a prohibitive tariff kicks in — are expected to be the EU Commission's tool of choice this fall for safeguards cases against Chinese imports. The talks now center on whether China will accept European safeguards limiting its auto exports — with tariff rate quotas potentially offering China some continued market access as a way to discourage retaliation — before negotiations can move on to other sectors. If China acquiesces, the conversation broadens to other sectors. EU imports of Chinese hybrids: 500,000 cars.

The 30-year gilt yield hit 6%. Meanwhile, UK 10-year gilt yield rose 7 basis points this morning to 5.45%. The problem is straightforward: higher yields mean higher debt service costs, which widen deficits, which require more borrowing, which pushes yields higher. You have seen this loop before. It is not more fun the second time. French presidential candidate Le Pen proposed a sharp deficit reduction based on "rationalization" of spending. The read from observers is that France still won't default, and that the current selloff is not disorderly enough for the ECB to trigger intervention. So everyone agrees it is fine, just not fine enough for anyone to actually do anything about it. The euro is trading at 1.12. Savings account yield: 1-2%.