Closing Thoughts for the Week

We may be closer to a credit event today than we have been at any point during the current cycle. We could be looking at a strong Treasury rally coming here very soon. But the real takeaway of the week is how it looks like credit conditions are turning and the markets are reacting. We’re definitely starting to build a consensus risk-off case right now and it may happen quickly.

The biggest development this past week was easily the outperformance of utilities relative to the broader market. I don’t necessarily want to get over-excited by this, but the magnitude of the move is very compelling. If utilities and Treasuries begin to outperform sharply at the same time, I really think it could mark the beginning of a correction.

It was a risk-off week for equities, in general, but bonds are still struggling to shake the impact of inflation expectations and the Fed. I think we’re going to look back at this point in time as the moment that the credit event really began taking shape. With the odds of another rate hike still a coin flip by the end of this year, any unexpected inflation increase in next week's CPI report could send interest rates higher again.