Closing Thoughts for the Week

Since the labor market seems to be the only thing the Fed cares about with regard to interest rates, I don’t see how the December data really changes the calculus. It’ll be interesting to see at what point the battle between inflation control and mitigating recession risk comes to a head. Does the Fed choose to keep conditions tight and just say “whatever happens happens” regarding the economy?

If you were waiting for the big year-end Santa Claus rally, you’ll probably need to wait until 2023. Market sentiment has been poor all year and it’s still poor heading into 2023. I’m not encouraged by how Treasuries behaved in December. The last two weeks, in particular, have marked a reversal of the risk-off behavior that had been developing and correlations with equities have turned positive again.

The markets usually head into the holiday break with a sense of relative calm, but there are really no off days. Losses in long-term Treasuries demonstrated that the bond market is still susceptible to the influence of central banks. Elsewhere, there’s little that happened this week to dispute the notion that conditions are still high risk and the markets are still vulnerable to a considerable pullback here.