Closing Thoughts for the Week

The Fed and the ECB did what was expected this past week, but the Bank of Japan made perhaps the biggest policy adjustment and one that caught the markets a bit off-guard. The market reaction wasn’t quite what I expected. I really thought the volatility spike would scare the bulls off when one of the last central bank holdouts finally started capitulating. That doesn’t change longer-term conditions though.

The past three trading days marked a major reversal of the risk-on trends that have been in place pretty much non-stop since the beginning of May. Is this a sign of a more significant reversal of this summer’s risk-on trade? It’s remarkably similar to what the markets did at the beginning of the year when I said conditions favored a melt-up in January. The one thing that’s still missing at this point is a bigger move in Treasuries.

The markets got the news they wanted this week, which is that the disinflationary process continues on both the consumer and producer sides. Most sectors posted weekly returns within ~1% of each other, so this current move is definitely broadening out. Next week tees up the start of the Q2 earnings season. The slowing pace of inflation, positive real wage growth and positive real interest rates might have households feeling better about their financial situations again.