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.

This communication is provided for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security or other investment. This communication does not constitute, nor should it be regarded as, investment research or a research report, a securities or investment recommendation, nor does it provide information reasonably sufficient upon which to base an investment decision. Additional analysis of your or your client’s specific parameters would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any client or portfolio and is not presented as suitable to any other particular client or portfolio.

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