Jobs, war and credit

Things are starting to get interesting. The U.S. unexpectedly lost 92,000 jobs in February (it was expecting a gain of 58k), and the unemployment rate ticked up to 4.4%. Oil prices keep going up, which means that gasoline will go up, and the conflict with Iran, which was expected to be short lived, seems today as it will be more than “a few days”, with the Pentapn now expecting the conflict to last till September. That’s way too long and way too close to the midterms. We cannot ask the Fed to consider the Iranian war to be an input in their decision on rates for the March 18th committee, but what would they do with the job market weakening and inflation picking up? There’s another data point as depicted in the chart below. The dark blue line is the 5 year CDX index for investment grade bonds, or simply put, how much do I get paid to bear the risk of a 5 year basket of IG corporate bonds. The light blue line is a basket of Private Credit loans. Around the summer last year, those two lines started to decouple, and now they look like they have nothing to do with one another. But they do. How’s is this going to play out? If the Iranian conflict is short, and oil recedes, inflation will not rise and the Fed will focus on the weakening job market and will lower rates, which will help the light blue line go down. As we stand today, it’s far more likely that the dark blue line starts to spike up, to reflect the connection between private and public markets. And then the Fed will react. Not before it happens, but after.

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