Weekly Risk Signals

The market’s reaction to Powell’s confirmation last week that rate cuts are on the way have shifted conditions in a short-term risk-on direction. The fact that Powell indicated that the labor market is slowing is telling. If this is the early stages of a longer-term trend, I wouldn’t be at all surprised to see the Fed cutting by 200 basis points or more by the end of 2025. In that event, equity prices would almost certainly be headed lower, perhaps significantly if credit starts to blow up.

The markets continue to reverse sharply from the VIX spike just two weeks ago. We’re back to an environment where mega-caps & tech are dominating again. The problem is that a lot of other asset classes aren’t confirming the bullish sentiment. This is the big risk that I feared would occur - an “any news is good news” response would trigger a flight back to risk assets and give investors the impression that two weeks ago was just a one-off event.

With many of the metrics that showed the highest volatility over the past few weeks - the yen, credit spreads, the VIX, the Nasdaq - beginning to calm down again, I worry that investors are going to fall victim to a sense of complacency again. The underlying macro backdrop for these markets hasn’t changed, outside of seeing some unwind in the yen carry trade. That’s a trading phenomenon though, not an economic one, and I feel that a lot of pent-up risks are still looming.