From the desk of Willie Delwiche.
Key Takeaways:
- In an effort to fight inflation, the Fed is likely to accept volatility but will be wary of stress.
- Equity market trends are deteriorating.
- Preserve capital and sanity - market doesn’t hand out participation medals.
Offsetting this likely need for more aggressive tightening is the potential for sanctions to strain the financial system in unexpected ways. When liquidity gets disrupted signs of stress can emerge. A widening in high yield spreads and/or a breakdown in the ratio between high yield bond and Treasury ETFs would be evidence that volatility is morphing into stress. That could slow the pace at which the Fed tightens and in the process worsen the problem of inflation.
