Weekly Market Report: May 13, 2022
Risk markets endured yet another difficult week, with the S&P 500 and NASDAQ posting a sixth consecutive down week, leaving the broad U.S. equity markets up only 15% over pre-COVID highs now that much of the valuation premiums have been right sized. While it’s too early to declare Monday’s 3.20% yield on the 10yr UST a near term high, the rise in interest rates did take a breather last week with most maturities falling 0.10% to 0.20%. Commodity markets were flat last week with oil holding onto the sharp gains of the past few months while the USD posted another strong week versus foreign currencies.
Market Anecdotes
• The bond market found some footing, at least for the time being with rates settling down in the back half of the
week. Corporate bonds are now offering a decent value relative to late last year.
• The exceptional volatility we’ve seen has left global equities trading at 15.5x (non-U.S. 12.6x and U.S. 17.6x), well into a cycle of recalibrating valuations and increasing the likelihood that fundamentals will remain a key driver of returns in the back half of 2022.
• FactSet noted 85% of companies have cited ‘inflation’ on Q1 earnings calls but this hasn’t translated to much profit margin compression which sits at 12.5% versus 12.7% on March 31st.
• Value/growth dynamics don’t stop at the U.S. border with generational outperformance of growth experiencing a meaningful reversion in conjunction with the rise in interest rates and inflation. That said, forward returns of international versus U.S. hinge on several dynamics.
• Several Fed officials echoed Powell’s assertion last week that 50bps hikes are the preferred approach. The Fed Funds future forward curve is suggesting the terminal Fed Funds rate is roughly 3.3%, well above the current FOMC forecast of neutral rate of interest.
• The Fed quantitative tightening program leaves very little likelihood of any FOMC open market sales of their U.S. treasury portfolio with a small possibility of MBS sales as things progress.
• Fundstrat highlighted how quickly markets have worked to price in the tightening of overall financial conditions, which is precisely what this Fed cycle is intending, relative to prior cycles.
• While criticism of Fed forecasting prowess is ample and easy, economists haven’t fared much better with eighth straight months of at or upside CPI surprises and just 3 of the past 24 reports surprising to the downside.
• ECB President Christine Lagarde leaned into potential rate hikes as early as the third quarter, pulling market expectations forward given the current inflationary backdrop in Europe.
• The Fed’s Senior Loan Officer Outlook Survey showed very robust demand for business loans, easy lending standards, and plummeting demand for mortgages.
• The latest SCOTUS controversy overturning Roe v Wade adds to a list of issues that may impact midterms including inflation, moderating growth, and fiscal policy. The most likely outcome remains congressional gridlock which can be viewed as marginally positive given the backdrop.
• POTUS surprised markets at the margin in a presser where he noted consideration of reducing tariffs on China.
• What’s going on with the USD? Looking at global currency reserves, BCA Research made note that of the 26% of outstanding treasuries held by foreigners, they estimate ‘allies’ hold approximately 36% and ‘non-allies’ approximately 23%.
