Junk Spreads Are Talking
One group of indicators that we follow quite closely are yield spreads. They work as great risk indicators as well as economic indicators. In the case of junk spreads they tend to lead rather than coincide or lag the overall economy. One area where they really shine is at the darker end of the economy. As you can see in the chart below junk spreads tend to lead the initial unemployment claims by anywhere from two-five months. For the past four months junk spreads have been inching higher and higher as the economy has noticeably weakened. What does this mean? Well if the correlation holds up then we would expect initial claims to move higher. This would go along well with most of the indicators that we are seeing such as the various manufacturing indexes pointing lower, with the exception of the Chicago PMI, as most indicators whether economic or market are pointing to a weaker economy. (Click on chart to enlarge)
Junk Spreads and Initial Unemployment Claims
Happy Trading,
Disclaimer-We are long US Treasuries and Gold.
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