Closing Thoughts for the Week

The overall theme of the financial markets might be changing from “is the U.S. economy slowing” to “how fast is the U.S. economy slowing”. There was some evidence this week that the more consistent return of traditional risk-off behavior may not be that far off. If the Fed decides to hold the line while the data continues to get worse, this gap between Treasuries and stocks could get wider.

The December CPI report didn’t really offer up any surprises, but there are some trends developing here. Conditions look much improved from even six months ago to the point where some inflation targets may already be getting hit. The preponderance of evidence suggests that short-term conditions have tilted back towards risk-on.

Since the labor market seems to be the only thing the Fed cares about with regard to interest rates, I don’t see how the December data really changes the calculus. It’ll be interesting to see at what point the battle between inflation control and mitigating recession risk comes to a head. Does the Fed choose to keep conditions tight and just say “whatever happens happens” regarding the economy?