Closing Thoughts for the Week

With gold up sharply and lumber prices down on the quarter, this is a very solid indicator that risk-off behavior is brewing. Treasuries are much more free to continue behaving like a safe haven asset and a counter-risk to equity volatility. But there are some curious signs building. The housing market could be a catalyst for an April decline, which the lumber/gold ratio is already signaling.

When two competing forces, such as Fed liquidity and a potential banking crisis, collide, it often creates a lot of volatility in the markets. I think that’s probably what we’re going to see next week and likely further into April. The Fed looks like it’s really stuck here. This past week's events suggest there’s a lack of control to both the situation and the central bank’s response to it.

The Fed is about to be put to the test next week at its quarterly meeting. It appears as though stealth QE might be in progress as the liquidity flood has resumed. A look under the hood and how much liquidity is actually being pumped into the system suggests that risk-off creates a delayed risk-on. Much like we saw stocks and bonds declining at the same time in 2022, the return of risk-on could feature both moving back up.