Weekly Market Report: April 8, 2022
Inflation, monetary policy, and the Russia-Ukraine war continued to drive headlines last week pressing, interest rates sharply higher and U.S. equity markets lower, breaking a streak of three consecutive positive weeks in the stock market. FOMC meeting minutes and related comments from Fed policy makers sent bond yields up to levels not seen since March 2019, pressuring higher valuation segments of the equity market (technology, consumer discretionary) while defensive areas (healthcare, utilities, staples) posted nice gains. Commodity markets were mixed with energy markets trading sideways but grains rallying on continued turbulence in Ukraine.
Fed minutes from the March meeting released last week illustrated a clear FOMC appetite for a faster pace of rate hikes, pressuring rates, and risk assets accordingly. Minutes also conveyed a faster pace of QT with a three-month ramp leading to a pace of $95b per month of roll-off.
• Comments from Brainard and Bullard effectively “strangled the dove” pushing long-term bond yields higher and un-inverting the yield curve accordingly. Aside from rate policy, balance sheet policy is being priced into markets with impact estimates as high as 350bps in 2022.
• CME futures is pricing in an 81% probability of a 50bps hike on the upcoming May 4th meeting and 53.5% of another 50bps on the June 15th meeting. Overall, markets are pricing approximately 266bps of Fed hikes over the next twelve months.
• The UN index of global food costs rose 13% in March to set a new record high, raising concerns surrounding both humanitarian and social/political implications.
• Bianco Research noted this is the first time the S&P 500 carried a negative 3mo return into a rate hike cycle and the fastest 2y/10y inversion post initial hike as well. Clearly, the unique nature of war and a global pandemic (supply chains) factor largely into these observations.
• U.S. Treasury par real yield curve rates (5yr, 10yr, 30yr) have increased from (-1.58, -0.97. -0.36) to (-0.58, -0.22, 0.15) reflecting tighter Fed policy and increasing TIPS break evens.
• A U.S. Treasury exemption allowing Russian debt payments through American banks through May 25th was also pulled back due to the reported violence in Ukraine.
• Early in the week Russian atrocities in Ukraine surfaced renewed calls for EU-imposed restrictions on oil imports from Russia and more aggressive exploration of weaning the EU off Russian natural gas.
• Economic fallout and social tensions from China’s COVID lockdowns are increasing with speculation on policy responses gaining attention commensurately.
• FactSet made the interesting observation that Wall Street analysts have more ‘Buy’ ratings on stocks, as a percentage of overall ratings, than any time since 2010.
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