Weekly Market Report: March 21, 2022
Last week was certainly a nice break from the unfriendly side of market volatility. War, monetary policy, Covid BA.2 data points, and both policy and politics in China were the primary influences driving markets last week. The S&P 500 was up 6.2% while developed international (+7.5%) and emerging markets (+6.6%) performed even better. The recovery was broad-based across sectors with only energy (-3.6%) posting losses. Interest rates ticked higher, and the yield curve flattened as investors handicapped Fed policy and narratives following the highly anticipated meeting and corresponding 25bps rate hike from the FOMC. Commodity markets (-2%) and the USD (-0.9%) were down slightly last week.
Market Anecdotes
•U.S. equity markets bounced higher in strong fashion last week with a string of four +1% moves (S&P 500 and NASDAQ) and even bigger bounces in Europe and U.S. small caps.
• After a ‘death cross’ on Monday, the S&P 500 went on to rally sharply back above its 50-day moving average, broke the downtrend channel in place since the early January record, and pushed nearly back to its upper Bollinger Band.
• The Fed raised rates by 25bps, forecasted six more, and reiterated they will remain nimble as data rolls in. Dot plot
interest rate projections show a 1.9% median target by year-end and a 2.8% target by the end of 2023. Balance sheet policy guidance (QT) will be forthcoming in May.
• The FOMC GDP forecast for 2022 was ratcheted down from 4.0% to 2.8%, the inflation outlook was increased from 2.6% to 4.3%. Wage growth and housing costs are the key ‘sticky’ components while supply chain and Russia-Ukraine disruptions loom in the background.
• A key decision point for the economy and stock market will be what level is the true ‘neutral rate’ of interest. Is it the FOMC’s terminal rate of 2.4% or is it closer to 3-4%? Stock markets would appreciate the Fed halting hikes below the neutral rate in the short term, policy would eventually have to counteract remaining too stimulative in the long-term.
• Last week the BoE delivered a dovish surprise with its 25bps rate hike by signaling a more cautious outlook and policy approach while the BoJ held rates steady as expected.
• China’s top economic official provided assurance that policymakers will implement measures to stimulate the economy and support the capital markets provided a big mid-week boost to risk assets.
• China’s zero-tolerance policy towards the COVID-19 may carry consequences to domestic economic conditions in addition to further aggravating global supply chain disruptions.
• The WSJ noted Zillow’s $56,000 average home price appreciation through February 2022 is the first time in the data series history where the homes earned more than their owners.
• The specter of rising rates and a narrow equity risk premium has owners of vanilla 60/40 portfolios driving plenty of attention and focus on alternative investments.
• Oil supply is under a microscope with the spike in uncertainty given stronger than expected U.S. production discipline, core-OPEC 2.0 production increases, and Iran/Russia indicating favorable resolution of their trade concerns which should allow 1.3m b/d back into global export markets.
Economic Release Highlights
• U.S. Retail Sales for February were in line with consensus estimates (0.3% vs 0.4%)
• February PPI data were in the ballpark of very hot consensus expectations with MoM headline (0.8% vs 1.0%) and core (0.2% vs 0.6%) readings and YoY readings of 10% and 8.4%.
• February U.S. Housing Starts (1.769mm), Housing Permits (1.859mm), and Existing Home Sales (6.020mm) were relatively in line with expectations.
• The March Housing Market Index fell just short of expectations at 79 versus consensus of 81.
• February U.S. Industrial Production of 0.5% and Manufacturing Output of 1.2% were at and in excess of consensus respectively.
