Weekly Risk Signals

Even as the stock market continues to rally, the signals are saying that it may not last for much longer. I think the most important market to watch here is bonds, not stocks. The markets are starting to price in the end of the rate hiking cycle this year and rate cuts beginning as early as the 1st half of 2023. The stock market, I believe, is thinking about a Fed pivot.

Investors should probably begin preparing for the high likelihood of recession in the not-so-distant future. Treasuries, interestingly, didn’t really react negatively to last week's inflation number and instead moved higher following the release. Initial earnings reports for Q2 were mixed and I continue to believe that this could potentially be a big source of volatility over the next month.

A better than expected headline jobs number last week accomplished two things. I mentioned last week that it was still too early to say that traditional risk-on/risk-off behavior has returned and I believe that to still be true. Intermarket asset volatility is still high and Treasury market volatility is as high as it’s been in more than a decade. The markets are still vulnerable to sharp swings here.