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This week brings the PPI and CPI reports, with PPI released on September 10 and CPI on September 11—a rare reversal, since CPI usually comes out before PPI. Interestingly, or perhaps not, PPI, Core PPI, CPI, and Core CPI are all expected to have risen by 0.3% month-over-month in August.

The Kalshi betting market indicates that CPI is expected to rise by 0.3%, and core CPI is expected to rise by 0.3%. The only thing I can see that differs from analysts’ expectations in Kalshi is that the headline CPI is expected to rise by 2.8% year-over-year, versus analysts’ estimates of 2.9%, and the swaps market is trading as high as nearly 3%. Hopefully, by the time we get to Wednesday, the markets will have come closer together in their views.

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(LSEG)

The jobs report came in weaker than expected, and the initial stock market reaction was a mild volatility reset that pushed the index higher at the start of the day. As soon as the headlines began to scroll across, the VIX fell sharply, releasing the event risk, which lifted the S&P 500 and sent volatility lower. This is nothing new—we see it all the time. Implied volatility levels simply weren’t high enough to have a bigger impact, so the equity rally was not only small but also very short-lived.

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But the jobs report also shifted other parts of the market in a more notable way. If the labor market is in question and there is real concern about the unemployment rate rising, we should expect high-yield spreads to widen. What seems clear is that despite equities reaching new all-time highs in both price and valuation, we have not seen HY spreads narrow to new lows. If credit spreads begin to widen—which they arguably should, given the uncertainty from the jobs report—then risk assets should be on notice as financial conditions start to tighten.

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Another reason financial conditions are tightening is the rise in overnight funding rates alongside the continued drain of the reverse repo facility.

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Also, with mortgage rates coming down, the spreads between jumbo and conforming loans are starting to widen. Believe it or not, if you check the NFCI website from the Chicago Fed, you’ll see that mortgage rates are one of the largest contributors to financial conditions. So the next time people on X start talking about the dollar and 10-yr rates falling, be sure to unfollow them—because while the dollar and rates play only a small role, it’s the spreads that carry much greater weight overall.

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If financial conditions are set to tighten due to fading liquidity and widening spreads, then risk assets should take notice. The S&P 500 is essentially a proxy for financial conditions, and this becomes clear when looking at the index’s earnings yield.

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