Confidence Floods Back Into US Markets: 3-Minutes MLIV

Summary

• Markets entering the weekend with heightened binary risk due to Middle East talks in Islamabad; a bad outcome could reverse the week's gains.
• Positive risk appetite observed in European and Asian futures, attributed to perceived de-escalation signs (Israel-Lebanon talks, fewer missiles).
• US high-yield (junk) bond market showing strength, with spreads tighter than at the start of the Middle East conflict and a key dollar bond index at a record high.
• Specific junk bond deals, including one from a tech company (implied to be Coreweave), are getting done, signaling issuer and investor confidence.
• The strong performance in junk bonds is interpreted as a signal of underlying confidence in the soundness of the US economy.
• The VIX index has retreated significantly, indicating returning market confidence seeping into deeper market corners.
• The upcoming US CPI print is anticipated (0.9% MoM headline, smaller core rise) but market sensitivity is uncertain; the reaction may depend more on subsequent Fed commentary regarding the balance of inflation and slowing growth.
• The core CPI is viewed as more important for detecting secondary inflation effects, but it is likely too early for that to be evident.