Weekly Risk Signals

What’s frustrating about the current environment is that these signals continue to tell the right story, but the results are not playing out as they should. The signaling continues to be correct, but the opportunity set is broken. Last week’s market action looks less like a response to inflation concerns and more like one to the idea that something is fundamentally broken here.

Last week’s hotter than expected inflation report should cement the notion that the Fed will continue to remain aggressive with the possibility of more rate hikes for a longer period of time. If investors were holding out hope for a soft landing before, the base case has probably shifted to a hard landing. I think we’re near the point where the long end of the Treasury yield curve stops pricing in inflation risk and starts pricing in recession risk.

The three equity signals continue to send the same risk-off message they have for weeks. The outlier remains the Treasuries signal, which is still reacting to yields that have yet to stop climbing. Market watchers are waiting to see what this week’s latest inflation data release holds. The bond market usually interprets things correctly and I think it’s sensing the outlook for inflation may not be optimistic.