Weekly Market Report: June 10, 2022
Markets took another punch in the nose last week with inflation (CP-Oh My) and ensuing central bank policy the primary driver. Whether we are again looking at a sharp repricing or looming recession remains to be seen, but equity markets are seemingly handicapping the latter given the volatility and depth of the correction, currently 19% off the early January record high. Bond markets reacted sharply to the CPI print on Thursday with both yields and credit spreads surging late in the week. Broad commodity markets were flat on the week with oil edging up slightly to close over $120, grains rallied, and industrial metals down. The USD received a flight to quality bid late in the week, closing up nearly 2% to close at nearly a 20-year high.
- As if 2022 was short on breaking records, we’d note that we are on track so far this year to register one of the most volatile equity markets on record and one of one of the largest P/E multiple contractions on record, and without a doubt the worst start for the bond market ever.
- Bond markets again provided little solace last week with yields rising anywhere from 10bps to 40bps, mostly centered on shorter maturities, and a notable widening in credit spreads.
- Inflation anxiety was front and center last week with prices of energy and food, emanating purely from the RussiaUkraine war, driving both the number and sentiment.
- There has been anecdotal evidence of a pretty sharp recovery in the semiconductor supply chain situation across the auto sector with restored capacity happening far sooner than anticipated. Daimler Chrysler noted they are back operating at full capacity.
- ECB hawks finally got their way with Thursday’s announcement which set the table for a 25bps rate hike in July while remaining data dependent thereafter. They made significant upward revisions to their inflation forecasts (2022 5.1% to 6.8% and 2023 2.1% to 3.5%) and downgraded growth (2022 3.7% to 2.8% and 2023 2.8% to 2.1%).
- Rising interest rates translating to rising mortgage rates which have pushed the average 30 yr fixed rate back above 5.5% has seen demand for mortgages plummet and existing home prices fall but affordability and foreclosures still paint a constructive picture.
- A compelling way to look at the U.S. housing market is through a ‘two stage’ lens with higher mortgage rates softening demand followed by higher inventory and softening prices which would lead to a disincentive for home construction.
- BCA noted Russian energy weaponization may seek to disrupt oil supplies in the Middle East and North Africa as well as undermine attempts to restore the 2015 U.S.-Iran JCPOA.
- BCA noted Chinese credit data for May came in higher (better) than expected but it’s coming off an extremely low April reading and April/May combined are still below 2021 levels.
- In a small-cap vs large-cap research note, we’d note relative forward earnings growth, valuations, and relative performance in light of recession anxiety make a decent case for favoring small-cap.
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