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.

Market Anecdotes

• 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.

Weekly Market Report: April 29, 2022

Risk markets last week sensed potential escalation paths in Ukraine alongside a persistently hawkish tone from the Fed and some mixed earnings reports, resulting in a sharp turn lower in equity markets, no significant moves in interest rates, and a safe-haven surge in the USD. The S&P 500 endured a fourth consecutive down week, ending down nearly 9% in April but developed and emerging market international stocks held up a bit better. Commodities and interest rates didn’t move much on the week with next week’s FOMC meeting on deck while the USD surged to nearly a twenty-year high.

Market Anecdotes

• Equity markets limped to end the week (-3.3%) and month (-8.7%) including a sharp move lower to end trading on Friday afternoon. Bespoke noted some observations regarding VIX (not peaking), semis (downtrend with support), breadth (improving), and the value/growth cycle.

• The rout in technology stocks continued last week, bringing the NASDAQ to a 13% loss in April, now down 21% YTD, its worst four month start to a year since the GFC.

• A weak GDP number countered by continued inflationary pressures seems unlikely to take the Fed off its path from ‘easy/emergency’ to ‘neutral’ policy but a pivot to ‘tight’ still seems off on the horizon.

• The Fed is widely expected to increase the Fed Funds rate by 50bps this week and announce details of their balance sheet reduction plan.

• The USD rallied 0.5% on five consecutive days through Thursday, tying 1978 and 1985 for the longest streak of that magnitude of a gain. It is now up 8% YTD and at levels not seen since 2003.

• Anxiety provoking rhetoric and conflict surrounding the Russian invasion of Ukraine including Russian accusations of a NATO proxy war and potential European energy embargos on Russian oil have fueled equity market volatility.

• FactSet noted that 55% of S&P 500 companies have reported earnings with beat rates and margins of 80% and 3.4% respectively. Blended earnings growth is at 7.1%. Revenue beat rates and margins of 72% and 2.2% alongside revenue growth of 12.2% remain relatively encouraging.

• The U.S. Senate confirmed Lael Brainard as Vice Chair of the Federal Reserve last week, 52-43.

• French President Macron defeated Marine Le Pen garnering 59% of the vote last week in what was half of his margin of victory in the prior contest back in 2017.

• An array of conditions has fed into an aggressive selloff in the RMB recently including deteriorating economic conditions, a narrowing trade surplus, and easing monetary policy.

• Blaine Rollins wrote that the semiconductor shortage has reached a level where an industrial company is buying washing machines to strip out the semiconductors to use in their modules.

Weekly Market Report: April 22, 2022

Market drivers last week included a more hawkish tone coming from central bankers, the first big slate of Q1 corporate earnings reports, and continued concerns surrounding inflation and supply chain issues due to CoVid protocols in China and the war in Ukraine. Global equity markets fell over 2% taking the S&P 500 back into double digit loss territory on the year. Interest rates pushed higher, particularly on the short end, on inflation data and hawkish central bank comments while commodity markets traded down on a 4.5% drop in oil prices.

Market Anecdotes

• Comments from the Fed and the ECB both leaned into more of a hawkish tone last week with Powell signaling comfort with 50bps in May and Joachim Nagel noting the possibility that QE may be concluded in the current quarter.

• The US 10-year inflation break-even climbed to over 3% on Friday, the highest level in at least two decades.

• Fed comments have firmed up market expectations of the pace and scale of rate hikes over the past two weeks 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.

• Q1 earnings season thus far has S&P 500 blended earnings growth at 6.6% and beat rates and margins of 79% and 8.1%. Revenue growth of 11.1% would mark the fifth straight 10%+ quarter.

• Technology and shadow technology stocks (FAANGs) are clearly facing some headwinds with the easing of Covid restrictions and rising interest rates. Facebook and Netflix have fallen the hardest, but Google and Amazon are meaningfully underperforming as well.

• 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.

• Data releases from China last week 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.

• The complexion of the REIT industry has changed notably over the past ten years with cell towers, data centers, industrial, and self-storage gaining at the expense of retail, office, hotels, and health care.

• A weak Yen in 2022 hasn’t translated to strong performance by Japanese exporters as evidenced by Japan’s equity market being down approximately 14%. Several forces factoring in with a rebound/reversion opportunity seemingly still in wait.

• Gold is finding itself in an interesting tug of war between inflation and global uncertainty on one end and a strong dollar and rising real rates on the other.

Weekly Market Report: April 15, 2022

The holiday-shortened week ushered in the beginning of first quarter earnings season alongside a relatively full economic calendar. Uncertainty surrounding monetary policy and the war in Eastern Europe continued as the primary undercurrents in the market. Global equity markets were mixed, but generally down for the week, while rising bond yields added to an already poor year-to-date outcome for fixed income investors. Oil and broad commodity markets enjoyed another strong bid last week pushing most commodities handily into double-digit returns for the year while the USD benefitted from the risk-off tone, notching a 0.50% gain for the week.

Market Anecdotes

• Prevailing uncertainties have translated to some notable equity market churn with the S&P 500 crossing below the 200 DMA six times and back above five times.
• After bouncing over 16% in the last two weeks of March, the NASDAQ has pulled back over 8% in what has been the
worst first half of April since the tech bubble crash in early 2000.
• Defensive sectors of utilities and consumer staples are now at all time high valuations, currently in the 99th percentile over the last 10 years.
• Sitting here on the doorstep of Q1 earnings season, it’s worth noting the Golub Capital Altman Index (private middle
market companies) experienced YoY earnings growth of 9% and revenue growth of 18% during the first two months of
2022.
• As the bond market suffers through one of its worst periods ever, we must ask if we are transitioning from TINA (there is no alternative) to BABY (bonds are better yielders)?
• A BofA fund manager survey shows 43% of fund managers believe inflation is transitory and 49% feel it is ‘permanent’. They also reported an average expectation of seven impending interest rate hikes.
• Fedspeak has been fairly consistent with one of the more hawkish FOMC members, Waller, noting last week that we are nearing peak-inflation readings. Markets still expect approximately +130bps over the next three meetings and twelve to thirteen over the full cycle.
• A poll by The Harrris reveals some of the real-world impacts higher inflation has on consumer spending patterns with
dining/impulse buys as the first cuts and travel/cocktails less elastic.
• Kastle published an interesting chart looking at return-to-normal activities including travel, dining, movies, but clearly not the office – casting further clouds on the office sector.
• Calls that the sky is falling due to mortgage rates hitting 5% last week were in abundance but a look at historical
mortgage rates from Bespoke provides some well-placed perspective.
• The sky is falling mentality clearly extended to AAII sentiment survey figures last week with bullish sentiment of 15.8% reaching its lowest level since 1992
• Defense spending by NATO countries shows the U.S. accounting for 69% of the total defense spend with material
spending increases across the NATO bloc. This is somewhat intuitive when adjusted for the distribution of the global
wealth, which is concentrated in the U.S.

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.

Market Anecdotes

  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.