Weekly Market Report: May 6, 2022
Market impactful events last week included monetary policy announcements by the Fed and several other central banks, ample inflation speculation, and continued Russia-Ukraine fallout (NATO enlargement, Russian-EU economic warfare). Altogether, the week translated to significant volatility across equity, interest rates, and commodity markets with notable moves higher in interest rates (+0.25%) and oil (+4.9%) but a relatively muted move in U.S. equities (-0.55%) contrasted with softer non-U.S. equity markets (-1.75%). The yield curve steepened significantly reflecting a marginally dovish FOMC and commensurately higher projected forward economic growth but growing anxiety over Russia-Ukraine conflict ramped the uncertainty factor.
• Quite a bizarre week in the equity market with neck breaking up and down moves netting to a pretty flat S&P 500 by the end of the week. Keeping investor emotions in check in times like these is easier said than done but strongly advisable.
• The 10yr UST bond traded above the psychological 3% level for the first time since a couple of brief windows in 2018, clearly exerting pressure on equity market multiples and translating to some record downside across fixed income markets.
• A big yield curve steepener on both 3m/10y 204 to 227) and 2y/10y (19 to 40) reflects a sharp upgrade to the growth outlook and higher inflation expectations accordingly.
• High yield spreads have started to expand with the OAS breaching 4% last week but remain relatively modest when viewed over a longer-term context.
• Real yields, as measured by the 10yr TIPS yield, moved sharply higher over the past week including a two day move of +30bps, taking the 38 day average up by nearly 125bps.
• Bianco Research made note that positive correlations between stock and bond prices translated to the second worst year (-9.6% thus far) on record for a 60/40 portfolio since 1988.
• Last week’s FOMC meeting produced the expected 50bps rate hike and the unveiling of a relatively rapid balance sheet unwind (QT). Powell also set expectations for two additional 50bps hikes in the next two meetings, after which they expect to see some moderation in inflation.
• Other central bank policy moves last week saw the Reserve Bank of Australia hike by 25bps, Reserve Bank of India hike 40bps, and the BoE hike by 25bps.
• U.S. earnings growth of 9.1% and sales growth of 13.3% alongside European growth of 11% and 9% respectively are outpacing consensus estimates, especially so in Europe.
• Financial system liquidity is a key barometer. Bespoke made note of a U.S. Treasury April-June borrowing report with a forecast of paying down net $26b versus prior a forecast of a net $66b borrow – the first time in six years the Treasury
announced an expected drop in debt stock.
• The ten-minute OPEC meeting last week resulted in a modest 432,000 bpd increase in oil production. Russian sanctions, a planned EU embargo on Russian oil, falling Chinese demand, and Russian threats of cutting off natural gas supplies to Europe are roiling energy markets.
• Black Knight’s March Mortgage Monitor report saw the delinquency rate drop to a new record low 2.4%, well below the prior 3.22% low mark set in January of 2020.
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