Closing Thoughts for the Week

The much better than expected 256K jobs added was good for the U.S. macroeconomic picture because it helps ensure that recession isn’t on the radar, but negative for the financial markets because it probably means the Fed will be able to cut rates very little this year. The larger implication is for inflation. It’s clearly possible that we may be in the early stages of a broader pullback for both equities and fixed income.

It was another quiet holiday-shortened week for the markets, but a new year brings a fresh outlook. Don’t be surprised if inflation quickly becomes a larger theme in the new year. We may be seeing risks starting to get priced into the bond market as well. High yield credit spreads have been expanding for three weeks. There are a lot of variables that could throw a wrench in the engine.

The week around Christmas generally sees low trading volumes and low volatility, but Friday’s action saw some steeper declines than investors may have been prepared for. The move in long bonds during a week of relatively low volatility indicates that the Fed and inflation are still very much on investors’ minds. It’s worth pointing out that high yield credit spreads have expanded by about 25 basis points over the past couple weeks.