It is now clear to an increasing number of recency-bias-blinkered investors that The Fed’s historical is very much back in play – after unleashing liquidity supernovas, they tighten “until something breaks”…

the Liquidity Supernova is over, and the Fed will tighten “until something breaks” https://t.co/0lCeMDS0iM pic.twitter.com/643y9VJicC

— zerohedge (@zerohedge) May 22, 2018

…and then of course, rinse and repeat…

as a reminder, Fed will keep hiking – as it always has – until it breaks something (i.e., the $20T USD short squeeze) pic.twitter.com/AzzEgtfKHr

— zerohedge (@zerohedge) September 13, 2022

And now Nomura’s Charlie McElligott warns that a “hike until it breaks” accident is now the most likely outcome, following the shock Inflation re-acceleration month-over-month (not just Core Services, but Core Goods) into an overheating Labor market with dangerously strong Wage Growth, which disturbingly hints at the Fed’s “Entrenched Inflation” worst-case scenarios:

1) Wage-Price Spiral and

2) Unanchored Inflation Expectations

As markets continue ratcheting-up their Terminal Rate projections from the Fed in reaction to the Core CPI upside surprise , the probabilities of the left-tail US economic “hard landing” scenario continue to explode higher.

Accordingly, the market did the “violent tightening of US financial conditions” work for the Fed, sending the US Dollar and Real Rates surging, which remains pure-poison for Risk-Assets (after a few days of dovish pivot hope)…

Simply put, McElligott warns, an impulsive surge higher in “Real Rates” means a rate-of-change shock in the “Cost of Capital,” and that risks slamming the brakes on the US economy via punitive borrowing costs on both Corporates and Consumers, which spills over into lower demand for goods and services…

All of which means equities face a valuation ‘death blow’ from the double-whammy of multiple destruction (from higher rates), AND lower earnings (from economic slowdown).

And as much as talking heads will kick and scream and close their eyes and block their ears, the Nomura strategist is clear that, unfortunately at this juncture, this intentional “crash-landing” of the economy has seemingly now become the lone path left available for the Federal Reserve in order to kill the “demand-side” of their idioyncratic Inflation disaster, which likely:

…and it seems clear now that the market “gets the joke”.

McElligott does offer a silver lining – almost. Echoing the thoughts of Jeff Gundlach and Scott Minerd, the Nomura strategist clearly believes more downside in asset prices is coming – from an overly aggressive Fed – but that is hastening a recession and The Fed’s flip-flop back to rate-cuts and QE… and ‘buy all the things’…

…perversely, a “Crash it Sooner” Fed hiking now then means a “nearer” and larger magnitude commensurate Fed CUTTING CYCLE thereafter (bear flattening in UST Cash curves now, forward bull-steepeners later)

As such, this is why EDM3-EDZ3 (Jun23-Dec23) Eurodollars added 8bps of EASING yesterday…

…the deeper the “hard landing” Recession, the larger and more aggressive the ultimate Fed EASING thereafter, and options markets continue to price for this counter-intutive fli-flop…

The issue – as always – is if traders start once again to front-run that flip-flop, then it reflexively reduces the magnitude and extends the timing of the flip-flop.