Markets are on notice: Rate hikes can recommence after a pause.

I’m not sure why there was any doubt in the first place. Unless the dictionary definition of “pause” has changed recently (which I suppose is possible given how wrong we all were about the definition of “transitory”), pause means a temporary stop.

Granted, we now know that transitory means years, and transitory is a cousin of temporary, so I guess you could argue that a central bank which pauses rate hikes is a central bank that won’t raise rates again for at least two years.

Sarcasm aside, this week’s developments on the monetary policy front were notable. Both the RBA and the Bank of Canada raised rates against consensus. The RBA hike was the second straight coming off April’s pause, and the BoC move on Wednesday came after a two-meeting break. In the new statement, the BoC expressed concern that inflation “could get stuck materially above the 2% target.”

If you believe it’s possible to divine something about central banks’ collective thinking from the resumption of hikes in Australia and Canada, the message is this: In the face of resilient economies and still-elevated inflation, policymakers are now reconsidering the assumption that the tightening delivered thus far will likely prove sufficient if we just wait around long enough.

Analysts are skeptical that the hikes are over. Goldman sees another Fed hike in July, for example, and TD’s chief Canada strategist Andrew Kelvin said the BoC’s Wednesday hike probably won’t be enough “to bring the economy back into balance.” TD expects another increase from the BoC next month.

The drama up north reverberated across the US rates complex. Market pricing for the Fed once again reflected a full hike across the June and July meetings, and the 5s30s re-inverted.

It’s safe to say that if next week’s US CPI report comes in hot, market pricing for cuts in the back half of this year will evaporate entirely, something the FOMC would greatly appreciate, particularly given that the new dot plot is guaranteed to suggest the Fed intends to hold terminal at least through year-end.

One consequence of yet another terminal rate rethink could be a reversal of the tech-over-everything trade. Yields were higher Wednesday in the wake of the BoC decision, and that likely contributed to outperformance for US small-caps versus big-cap tech.

Generally speaking, market observers assumed the post-NFP small-cap rally was a fluke, but if rates traders are compelled to reprice terminal expectations meaningfully higher (or price out 2023 cuts, pushing easing bets into next year), that could turn the tide for a rally that’s been mercilessly criticized as too narrow to be sustainable.

The Russell has outperformed mightily in three of the last four sessions, a stark reversal after the performance disparity with the Nasdaq 100 reached dot-com-esque extremes amid A.I. euphoria.

Of course, if the combination of higher terminal rate pricing and fading odds for near-term easing is enough to derail risk appetite entirely, underperformance for small-caps and other cyclicals could worsen further.

There’s a fine line between “no landing” and “hard landing.” The more likely a “no landing” scenario looks, the more aggressive the Fed will generally be, which in turn raises the odds of a “hard landing.” We saw that ebb and flow from January to February this year.

So, a glass half-full take would be to suggest it’s a good thing that central banks are now ratcheting rates higher again, as it’s evidence to support the notion that growth is resilient, and that with any luck at all, inflation will recede to tolerable levels with no recession. In that case, equity gains should broaden out.

The glass half-empty take goes something like this. Inflation looks like it’s going to loiter between 3.5% and 4.5%, which central banks aren’t going to tolerate, and if we learned anything from October’s gilt meltdown and March’s US banking turmoil, it’s that r-double-star is materially lower than r-star, so additional tightening risks a financial crisis. An honest-to-God financial crisis would certainly do the trick in terms of disinflationary demand destruction, but that’s more crash landing than hard landing. No one wants that.

With the above in mind, two developments in the options space were worth mentioning. Tuesday’s hefty gains for US small-caps were accompanied by massive call volume on a popular Russell 2000 ETF, and by “massive” I mean the largest spike in more than a decade. As one Bloomberg blogger pointed out, the surge counted as a near seven-standard deviation event versus the rolling 252-day average.

On Wednesday, in rates, someone bet $7.5 million in a trade targeting a rise in 10-year US yields to 4.25% by the end of August.

Meanwhile, Chrystia Freeland acknowledged that some voters may be nervous about the BoC’s latest move. “There are a lot of Canadians who are anxious right now and who will be concerned when they see this step taken by the Bank of Canada,” she said Wednesday. “The destination is stable, low inflation and steady, strong growth. And that is the direction that we are heading.”