It was a risk-off week for equities, in general, but bonds are still struggling to shake the impact of inflation expectations and the Fed. Utilities finally had a solid week relative to the S&P 500, but that sector’s been such a mess that it’s impossible right now to tell if that’s just a dead cat bounce. Small-caps struggled again, which continues its months-long trend of being volatile, but making no consistent progress versus large-caps. Long-term Treasuries remain stuck in this no man’s land where every time there’s even a modest rally, it gets swallowed up and yields push to fresh near-term highs. The Fed is expected to hold rates steady at their meeting later this month, but the markets still think there’s a 50/50 chance we’ll see another quarter-point move. That combined with the fact that interest rates are likely to remain elevated until well into 2024 (even if there’s no Fed rate hike) is putting a cap on Treasury upside that might be tough to break through in the near-term.
The bigger picture focus should instead be on the credit event catalysts that I’ve been talking about for months. I think we’re going to look back at this point in time as the moment that the credit event really began taking shape. Credit card delinquency rates are rising, especially at the smaller regional banks where they just hit new all-time highs. Even delinquency rates at the big banks are double what they were two years ago. Demand for construction & industrial loans has plummeted. Let’s not forget that student loan payments just restarted and an alarming number of borrowers say they’re just not going to pay. Any one of these in isolation would be cause for concern. The fact that they’re all happening at the same time, with the troubles in China in the background, I think it’s time for investors to get their guards up.
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