It may have been a shortened trading week, but it was long on signals. The biggest gains for the week came from gold, utilities and small-caps - all up more than 2% - while long-term Treasuries added another 0.6%. The key takeaway for the week is that while cyclicals remain firmly in control here thanks to the Fed’s willingness to let the reflation trade cook, the uncommon strength in the traditionally defensive assets is signaling some trouble below the surface.
The week’s most closely watched economic report was Friday’s PCE price index and it didn’t really offer any surprises. The year-over-year rate of 2.5% probably isn’t going to do anything to alter the Fed’s rate cutting plans, but the short-term annualized rate, which is still running north of 3%, could eventually put pressure on yields to move higher. The Fed may want to take an “if it ain’t broke, don’t fix it” mentality in the hopes that it can keep steering towards the soft landing, but I think the action in gold here is pretty telling.
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