Closing Thoughts for the Week

The markets have been waiting for the labor market to show some cracks before really worrying about a potential recession. This past week, we got some indications that things might finally be trending in that direction. Prior recessions have come with sustained periods of significant job losses and we still have a long way to go to get to that point.

Jerome Powell’s speech at Jackson Hole saying that additional rate hikes are still on the table was perhaps disappointing to some investors, but not exactly surprising. The market’s reaction on Friday showed investors took the hawkish tone largely in stride with long-term Treasuries actually moving modestly higher on the day. Overall, the risk-off trend continues to slow-build and it looks like investors’ willingness to bid up tech shares to ridiculous valuations is fizzling out.

Is the credit event upon us? It would certainly seem that conditions more than favor this argument. Treasuries, however, is the one asset class that just refuses to budge. Earnings results from the big retailers have the markets believing in the resilient economy narrative at the expense of some compelling and worsening tail risks. There’s a lot of tinder out there right now and any one of these things could trigger a big credit event.