Closing Thoughts for the Week

Investors flocked back into risk assets in a week that featured a sharp reduction in volatility and a significant shift in sentiment. The Treasury market, however, continues to signal its concerns about the economy. I think this past week’s big move in equities was more of an oversold bounce.

Volatility is still the name of the game. The longer high inflation rates last, the more likely it is, in my opinion, that the U.S. economy slips back into recession in the next 12-24 months. As I noted in this week’s global view, 4.5% on the high yield credit spread is the level to watch here. Once that level is breached, the closer we get to the true risk-off environment that I’ve been talking about for a while.

Even though U.S. stocks were down 1-2%, utilities and gold were both up more than 4% each, while long-term Treasuries gained 2.5%. One thing I’ve been watching closely here is the 2-year Treasury yield, which has turned quite volatile over the past couple weeks after a slow and steady climb higher since late last year. Based on the latest comments, it sounds like the Fed is going to tackle inflation head on even if it means tightening conditions into a slowing economy.