Weekly Market Report: October 7, 2022

Last week delivered some frustrating back and forth price action with remarkable gains to start the week later washed out by renewed anxiety surrounding rising policy rate expectations. Numerous FOMC members reinforced the hawkish narrative which drove risk markets lower and interest rates higher. The week finished with minor gains across global equity markets (S&P 500 +1.5%) and another leg higher in interest rates, particularly across the shorter maturities. Commodities surged higher on the back of a 16% rally in crude oil prices and the USD moved higher still, up 0.9% on the week.

Market Anecdotes

• A graphical look at year-to-date total returns for stock and bond markets makes your stomach turn while the USD makes your heart sing. The persistent rise in interest rates (nine consecutive weeks) is the clear driving force behind all three markets. 
• A silver lining of the surge higher in interest rates is that Treasuries are offering yields higher than any time since 2007. 
• The move higher in yields has yet to invert the 3m/10yr portion of the curve – perhaps signaling recession may be less likely than widely assumed. 
• Eighteen Fed speaking engagements last week served to reinforce hawkish policy expectations with repeated emphasis on the Fed’s dual mandate of labor market and price stability coupled with subtle reminders the Fed mandate does not include managing the financial markets. 
• You can add the World Bank and United Nations to a list including Paul Krugman, Elizabeth Warren, Greg Mankiw, and maybe most importantly Nick Timiraos suggesting that the Fed may be tightening too far amidst a global economic slowdown. 
• The business of forecasting inflation seems uniform with both the Fed and Wall Street forecasting a pretty straight line fall back to approximately 2.5% by late 2024. 
• Bianco Research makes the case that two of three deflationary forces (cheap labor, cheap goods, better technology) have given way and technology’s ability to offset is questionable. 
• While nominal wages have been increasing at an alarming rate, real wages have fallen notably as evidenced by average hourly pay in August down 2.1% this year, adjusted for inflation. 
• OPEC+ agreed to a 2mbpd production cut last week which is roughly 2% of global consumption and EIA data showed U.S. inventories dropping farther than expected. 
• Whether the Credit Suisse situation is an isolated bankruptcy risk or potential systematic event remains to be seen but markets are clearly looking past their issues. 
• The bullish contingent at BCA again highlighted three very clear pillars of support for the U.S. economy including labor market, robust consumer demand, and confidence in the Fed’s ability/resolve in beating inflation.

Economic Release Highlights

• The September jobs report registered 263,000, slightly more job creation than consensus call of 250,000 and the unemployment rate fell two ticks to 3.5%. The participation rate (62.3% vs 62.4%) and average hourly earnings (5.0% vs 5.1%) were both relatively in line with consensus.
• The August JOLT survey showed job openings falling much further than expected to 10.053mm, well below consensus calls for 11.150mm and further yet below July’s 11.239mm.
• September ISM Manufacturing Index reading of 50.9 fell short of the consensus estimate of 52.4. ISM Services beat expectations (56.7 vs 56.0) and improved one tick over the prior month.
• The JPM Global Manufacturing PMI declined slightly to 49.8 from August’s 50.3 reading. Global Services PMI came in at 50, just above expectations for 49.3.

Weekly Market Report: September 30, 2022

Markets put a bow on a week, a month, and a quarter to forget last week including hitting a fresh 52-week low and chalking up the worst month in U.S. equities since 2008. The prior week’s flurry of central bank meetings expressing resolve in battling inflation has resulted in an exceptionally strong USD, surging bond yields, oil
dipping below $80, and an extension of the equity market selloff. U.S. and emerging markets fell approximately 3% while developed international markets were off 1.3%. The 10yr UST traded briefly above the 4% mark but settled back to 3.83% to close the week. Commodities were relatively unchanged on the week and the USD weakened slightly (0.95%) on the week.

Market Anecdotes

• Commensurate with the historic selloff in bonds, a look from Refinitiv and Bloomberg at volatility in interest rates illustrates how much of an outlier we are experiencing with record high MOVE Index readings coupled with record high bond market drawdowns.
• The USD has been on a tear since early 2021 thanks to real rate differentials, risk aversion, and global growth dynamics. Ultimately, dollar strength translates to tightening financial conditions and a domestic deflationary force with respect to global trade.
• Nineteen Fed speaking engagements last week did little to change the narrative coming out of the September FOMC meeting. Focus remained with persistence and resolve on the tightening cycle at hand.
• An upward revision in Q2 personal consumption and decline in initial jobless claims added to the hawkish narrative in what’s likely to be a “good news is bad news” narrative for some time.
• U.S. GDP slipped into negative territory for the first half of 2022 and borrowing costs have risen sharply yet payrolls have increased by an average of 438,000 between January and August and consumers have continued to spend.
• A hot reading in German inflation (10.9% YoY and 2.2% MoM) underscored the need and likely justification for another 75bps ECB hike on October 27th.
• The pandemic rally in overall commodity prices has fizzled with industrial metals, energy, and precious metals all declining but agricultural commodities have stabilized (+3.5% since beginning of August).
• A look by Fidelity at weekly and three-month flows (funds/ ETFs) into equity markets shows investors have yet to run for the exits with flows remaining relatively stable. AAII bearish sentiment readings are near record highs while bullish readings are 17.7% below average.
• Cash is king in a market where both bonds and stocks have been hammered. Bloomberg reports roughly $4.6t is sitting in US money markets, just shy of the 2020 record $4.8t.
• Negative years like 2022 are when hedge funds earn their keep, and this year is no different with CTA and global macro funds profiting nicely relative to long-only/long biased strategies.
• The BoE signaled it would intervene in the bond market to prop up the gilt following a surge in bond yields due to a sizable fiscal stimulus package announced last week. Additionally, the UK government reaffirmed its commitment to BoE independence amidst rumors to the contrary.

Economic Release Highlights

• The August PIO report revealed YoY headline and core inflation of 6.2% vs 6.1% and 4.9% vs 4.8% alongside MoM readings of 0.3% vs 0.2% and 0.6% vs 0.55, all exactly 0.1% higher than forecast.
• The August PIO report revealed higher than forecasted Personal Consumption Expenditures (0.4% vs 0.2%) and in line Personal Income growth of 0.3%. 
• Consumer Confidence in September improved over the prior month, higher than forecasted (108.0 vs 104.3).
• The third revision of Q2 GDP maintained the headline QoQ AR of -0.6% but did see a material upward revision in personal consumption expenditures from 1.5% to 2.0%.
• August Durable Goods Orders were marginally better than forecast with New Orders (-0.2% vs -0.4%), ExTransportation (0.2% vs 0.1%), and Core Capital Goods (1.3% vs 0.7%) exceeding consensus forecasts.
• China’s Caixin Manufacturing PMI Index dipped further into contractionary territory registering 48.1 versus
consensus estimate of 49.4. The CFLP PMI (C, M, S) registered 50.9, 50.1, 50.6.
• July Case-Shiller Home Price Index missed consensus on both MoM (-0.4% vs +0.3%) and YoY (16.1% vs 17.0%) measures.
• August New Home Sales of 685k came in much stronger than the 498k forecasted and increased over the prior month’s reading of 532k. Pending Home Sales fell 2% versus expectation of -0.8%.

Weekly Market Report: September 23, 2022

All eyes were on the FOMC decision and narrative last week with a relatively light economic calendar and sparse 2Q earnings announcements. Safe to say, the Fed delivered another dose of tough love, and it wasn’t very well received by risk markets as it was made clear the Fed is pretty comfortable with a policy induced recession. Thanks in large part to surging global interest rates, global equity markets traded down sharply with the S&P 500 touching a new bear market low, now -23.7% below the post Covid high. Developed international and emerging market equities traded sharply lower as well as U.S., German, and U.K. bond yields all marked new multi-year highs. Oil (-7.5%) dragged the commodity complex lower in sympathy with slowing global economic activity.

Market Anecdotes

• It was a difficult week with surging global bond yields and the ripple effect in what has been a historic bond market route and commensurate slide in equity markets where we’ve now endured three 10%+ downdrafts following the record high in early January.
• The surge in bond yields is historic no matter how you look at it. The 2y/10yr inversion exceeded 50bps last week – the deepest inversion we’ve seen since 1982 and a level commonly found in recessions (22% of the time) and always within 15 months of one.
• The FOMC delivered a third consecutive 75bps rate hike last week, taking rates to 3.0-3.25% and revised projections to another 125bps by year end with terminal rate expected to land at 4.5%-4.75%.
• In addition to median rate expectations detailed above, the SEP included downward revisions to forecasted economic growth and upward revisions to core inflation and unemployment.
• Synchronized tightening maintained its global theme last week with the U.S., BoE, Sweden, and Swiss central banks (among others) hiking rates while the BoJ again left rates unchanged. Accordingly, overall financial conditions have tightened meaningfully.
• USD strengthened 3.12% last week, wreaking havoc on FX markets including inducing Japan to engage in its first direct FX intervention since the 1990’s. The Euro is down 17% YTD and only three EM currencies (Mexico, Peru, Brazil) are up on the year with most down over 10%.
• The British Pound traded sharply lower on the announcement of a UK plan for the largest tax cuts since 1972, including the elimination of the top income tax bracket in a bid to stoke growth.
• Despite exceedingly tight global oil markets and ever-present geopolitical risk, oil has traded down in sympathy with concerns about falling global demand amid the economic slowdown.
• The Atlanta Fed GDPNow model which was firming in early August has deteriorated sharply in recent weeks with the latest Q3 U.S. GDP estimate at 0.3%.
• One consistently dovish monetary policy talk point is that while current inflation remains elevated, households seem to expect the Fed to succeed in bringing down inflation based on NY Fed, UofM and other household survey data.

Economic Release Highlights

• September U.S. PMI (C,M,S) of 49.3, 51.8, 49.2 measures improved meaningfully relative to August and beat consensus (47.0, 51.3, 45.0) across the board.
• September composite, services, and manufacturing PMI prints for September in the EU and UK were all in contractionary territory.
• The Conference Board LEI for August declined 0.3%, more than expectations for -0.1%, posting a sixth consecutive MoM decline.
• August Housing Starts (1.575M vs 1.440M) and Permits (1.517M vs 1.621M) came in above and below respectively, their consensus estimates. Existing Home Sales of 4.8M came in higher than forecasted (4.7M) but in a slowing trend with both MoM (-0.4%) and YoY (-19.9%) cooling off.
• September’s Housing Market Index registered a depressed 46 versus a consensus estimate of 48

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%.

April Market Review

April was the cruelest month of the year thus far with all major global financial assets performing poorly with the exception of the U.S. dollar. Monetary policy, inflation, supply chain disruptions, Chinese zero tolerance Covid policy, and the war in Ukraine combined to push rates and commodities sharply higher and global equities lower. After posting one of the only positive numbers in March, U.S. equity markets lost 8.7% in April, one of the worst returning equity markets globally with technology stocks leading the way down as evidenced by the NASDAQ marking its worst monthly decline since the global financial crisis in 2008. Chinese equity markets (-4.1%) saw a late month rally with expectations of easing both monetary policy and technology regulation while Europe was a top relative performer losing only 0.75% in local currency terms but -5.75% after adjusting for the strong U.S. dollar. Fixed income markets posted a fifth consecutive month of losses with both U.S. bonds (-3.75%) and non-U.S. bonds (-6.99%) losing substantial ground. Interest rates crept higher on monetary policy (Fed among others) and inflation concerns with inflation data sticking at multi-decade highs. High yield credit spreads moved methodically higher through the month, from 3.43% to 3.97% but remain relatively low in a longer-term context. Commodity markets enjoyed another strong month of gains mostly through the energy and agricultural complexes while industrial and precious metals both lost ground in April. The Russia-Ukraine war has sent energy and agricultural prices soaring this year with oil (+44%) and natural gas (+103%) as well as corn, wheat, soybeans up 27%-38%. The labor market, economic activity, and corporate earnings all look relatively encouraging with elevated inflation and its uncertain path forward posing questions to any bullish thesis. Unemployment of 3.6%, service and manufacturing surveys solidly in expansionary territory, and U.S. earnings growth of approximately 9% all suggest relatively healthy underlying fundamentals.

Market Anecdotes

• FactSet noted that, through April, 55% of S&P 500 companies have reported earnings with beats and margins of 80% and 3.4% respectively. Blended earnings growth is at 7.1%. Revenue beats and margins of 72% and 2.2% alongside revenue growth of 12.2% remain relatively encouraging.
• The yield on the 10-year Treasury note posted its biggest monthly gain in 13 years. Global bonds have lost 11.30% in the first four months of the year and 5.48% just in April resulting in the worst monthly and YTD return in history. Bloomberg’s U.S. Aggregate Index posted worse monthly returns on only two occasions, October 1979 and February 1980 during the last bout of runaway inflation in the U.S.
• Stocks are also off to their worst start on record. The S&P 500 is down 12.9% so far this year, marking the index’s worst YTD return in almost 95 years of history.
• The Nasdaq dropped 13.2% just in the month of April; its worst showing since October 2008. The index is down 21% in 2022; its worst start to a year on record. The FANMAG complex lost over $1 trillion in market cap just in April.
• Commodities continued to power higher in April. The Bloomberg Commodities Index returned 30.75% in the first four months of the year, far outpacing the returns at a similar point of any other year on record.
• For the month, WTI rallied 4.4% and finished the month at $104.7 per barrel. Factors include lack of Russian supply to the West, Saudis holding back supply, and US ramp up. April’s rally marks a five-month streak of higher prices which is second on record only to the eight-month rally of late 2010/early 2011.
• The French election victory of Emmanuel Macron over Marine Le Pen gave markets a dose of familiarity and certainty with respect to France’s role within the EU and globally.
• Fed comments have firmed up market expectations of the pace and scale of rate hikes with 325bps currently priced in over the next twelve months. In response, the Bloomberg Aggregate bond index (YTD) has experienced its worst return in history.
• April data releases from China reveal a mixed bag of moderate growth countered by CoVid-19 related drag on economic activity at a time with depressed private sector demand and weak housing market. Shipping congestion in Chinese ports is also clearly on the rise.
• A weak Yen in 2022 hasn’t translated to strong performance by Japanese exporters as evidenced by Japan’s equity market being down double-digits. Several forces factoring in with a rebound/reversion opportunity seemingly still in wait.