Weekly Risk Signals

The labor market looks like it’s finally beginning to feel the effects of the Fed’s aggressive interest rate hiking cycle. Since the labor market is a big driver of just about everything that happens in the economy, the groundwork for an economic slowdown is being laid. The back and forth in labor market data has kept volatility in the bond market high. We may be shifting from a “resilient economy” narrative to a “cooling but still healthy” one.

Powell’s comments from Jackson Hole last week that the Fed was prepared to tighten policy further wasn’t really surprising and the market took it as such. It will, however, keep the pressure on Treasuries and act as an impediment to investors viewing them as a risk-off alternative to equities. While market watchers remain focused on the resilient economy narrative, there are some hints of defensiveness under the surface.

Even though all four signals remain risk-on for another week, there’s definitely some risk-off sentiment building here. As long as the Fed remains hawkish, which will likely get confirmed by Powell at the upcoming Jackson Hole summit, and the latest headline economic numbers look strong, there’s probably little incentive for bond yields to make a meaningful move lower here. Unless we’re near the advent of a major credit event.