Last Week In Review
Last week equity indexes finished lower for the week, with small-caps and growth stocks lagging considerably. Sector performance also varied widely within the S&P 500 Index, with the typically defensive consumer staples and health care sectors recording solid gains. In contrast, steep losses are registered in information technology, communication services, and consumer discretionary shares. Traders I spoke with noted that volumes were sparse for much of the week as investors awaited the start of the first-quarter earnings reporting season. Last Monday, Twitter shares jumped over 27.0% following news that Elon Musk had acquired a 9.2% stake in the social media firm.
Federal Reserve policy and the situation in Ukraine continued to loom large over sentiment. Stocks pulled back sharply on Tuesday morning after Fed Governor Lael Brainard, widely considered among the most dovish policymakers, promised that the Fed would start to “reduce [its] balance sheet at a rapid pace as soon as our May meeting.” Later that day, Federal Reserve Bank of Kansas City President Esther George told Bloomberg that there was “no question” that the Fed had to act rapidly to quell inflation.
Last Wednesday, stocks fell further following the release of minutes from the Fed’s mid-March policy meeting. The minutes revealed that policymakers were prepared to reduce the central bank’s balance sheet by USD 95 billion per month, more than the consensus expectation of around USD 80 billion. Although not quite as much as the worst-case scenarios some on Wall Street had imagined. The minutes also showed that officials were prepared to raise rates by 50 basis points (0.50%) at their upcoming May meeting. By the end of the week, futures markets were predicting that the most likely scenario was for the federal funds target range to hit 2.50% to 2.75% by the end of the year—well above its current range of 0.25% to 0.50%.
US – Markets & Economy
The week’s economic calendar was relatively light but arguably suggested that the economy was proving resilient in the face of inflation and the war in Ukraine. Weekly jobless claims fell much more than expected to 166,000, the lowest number since 1968. Continuing claims rose unexpectedly, however. The Institute for Supply Management’s gauge of service sector activity came in slightly below consensus expectations but still indicated robust expansion.
US – Equity Market Performance
|Index||Friday’s Close Week Ending 4/1/2022||Weekly (+/-) Point Change 4/1/2022||% Change YTD Week Ending 4/1/2022|
|S&P Midcap 400||2,617.09||-93.06||-7.91%|
SOURCE: BLOOMBERG. THIS CHART IS FOR ILLUSTRATIVE PURPOSES ONLY AND DOES NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. PAST PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS.
US Yields & Bonds
Last week the Fed laid out plans for rapid quantitative tightening (i.e., reducing the bond holdings on its balance sheet), which caused the yield on the benchmark 10-year U.S. Treasury note to hit its highest level since early 2019. (Bond prices and yields move in opposite directions.) The move also led the closely watched two-year/10-year segment of the Treasury yield curve to steepen meaningfully as the difference in yield between the two maturities increased. The brief inversion in that segment during intraday trade last Friday had raised concerns about a looming recession. However, the five-year/30-year curve segment—also considered by many investors to be a recession indicator—remained negatively sloped.
Tax-exempt municipal bonds continued to struggle but outperformed U.S. Treasuries through most of the week. Traders indicated that continued industrywide outflows from municipal bond portfolios—which accelerated over the past week, according to data from Refinitiv Lipper—led to heavy selling activity.
According to traders, technical conditions in the investment-grade corporate bond market were hampered by challenging liquidity and subdued overnight demand from Asia. Broader risk sentiment weakened alongside the hawkish Fed minutes and comments from Fed Governor Brainard. More volatile corporate bonds generally underperformed during periods of weakness.
According to traders, high yield bonds experienced weakness given the sell-off in rates and equities, while hawkish Fed commentary kept most buyers on the sidelines. Additional sanctions on Russia levied by the global community further escalated concerns about inflation and the corresponding Fed policy responses, which also weighed on risk assets like high yield bonds. Traders also noted that the primary market was active early in the week, but the new issuance volume later subsided.
Bank loans held up better than broader risk markets as light issuance and positive flows created favorable technical conditions for the asset class. Traders noted that sellers mainly focused on the higher-dollar segment of the market while there was strong demand.
US Treasury Markets – Current Rate and Weekly Change
3 Mth: +0.17 bps to 0.68%
2-yr: +0.05 bps to 2.51%
5-yr: +0.19 bps to 2.75%
10-yr: +0.32 bps to 2.70%
30-yr: +0.29 bps to 2.72%
SOURCE: FOR THE WEEK ENDING April 8, 2022. BLOOMBERG. YIELDS ARE FOR ILLUSTRATIVE PURPOSES ONLY AND DO NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. YIELD CHANGES ARE FOR ONE WEEK. PAST PERFORMANCE CAN NOT GUARANTEE FUTURE RESULTS.
Interesting News Overseas
Shares in Europe rose modestly amid concerns about central bank tightening, inflation, and Russia’s invasion of Ukraine. The pan-European STOXX Europe 600 Index rose 0.57% in local currency terms. The main continental stock indexes were lower. France’s CAC 40 Index fell 2.04% on election uncertainty, with polls showing a significant narrowing of President Emmanuel Macron’s lead over far-right contender Marine Le Pen. Italy’s FTSE MIB Index declined 1.37%, and Germany’s DAX Index lost 1.13%. However, the UK’s FTSE 100 Index advanced 1.75%.
Core eurozone bond yields climbed in tandem with U.S. Treasury yields. The imposition of additional sanctions on Russia and expectations that the U.S. Fed would tighten monetary policy aggressively sparked a sell-off in core bonds. Minutes of the European Central Bank’s (ECB’s) meeting was also hawkish, pushing yields higher. Peripheral eurozone and UK government bond yields broadly tracked core markets.
The European Union (EU) joined the U.S. in imposing more sanctions on Russia after reports that Russian forces had committed war crimes in Ukraine. The EU proposed to ban imports of Russian coal and new machinery exports while targeting the assets of more Russian oligarchs and President Vladimir Putin’s two adult daughters.
Japan’s major stock benchmarks fell over the week, with the Nikkei 225 Index down 2.46% and the broader TOPIX Index declining 2.44%. A further easing of border restrictions failed to offset the adverse impact on the sentiment of a hawkish U.S. Federal Reserve and the negative repercussions, particularly inflationary pressures, of the war between Russia and Ukraine. China’s market weakness also posed a headwind. The 10-year Japanese government bond yield rose to 0.23% from 0.21% at the end of the
previous week. The yen depreciated to around JPY 124.05 against the U.S. dollar, its weakest level in nearly seven years, from the prior week’s JPY 122.51.
Commenting on the yen’s depreciation against the U.S. dollar, Bank of Japan (BoJ) Governor Haruhiko Kuroda said that recent moves had been “somewhat rapid.” He emphasized the extreme importance of currency rates moving stably, reflecting economic and financial fundamentals. The BoJ is closely monitoring the foreign exchange markets due to their impact on the economy and prices. Kuroda also noted that a weak yen is positive for the economy as it boosts the value of domestic companies’ overseas earnings. Conversely, it inflates import costs when higher energy and commodity prices weigh on a still-fragile economic recovery. The BoJ remains committed to its powerful monetary easing in pursuit of its 2% inflation target to ensure price gains accompanied by increased corporate earnings and wages.
Lastly, the IMF downgraded its projection for Japan’s economic growth in 2022 from 3.3% year over year to 2.4%. The intergovernmental organization highlighted continued strong policy support and a high vaccination rate as factors underpinning growth but believes that the recovery in domestic demand will slow due to higher commodity prices and the elevated uncertainty related to the Ukraine conflict. It also expects a pickup in inflation, projecting the headline core consumer price index at 1.0% in 2022.
This Week Ahead
It will be a busy week in the U.S. as the earnings season kick-off and several economic releases will provide an essential update on the American economic recovery and inflationary pressures. Traders will also follow speeches from several Fed officials for any further details on the central bank plans for the next FOMC meeting. On the earnings front, JPMorgan Chase and BlackRock are due to report on Wednesday, and Citigroup, Wells Fargo, Morgan Stanley, and Goldman Sachs are on Thursday. Meanwhile, CPI data on Tuesday is expected to show the inflation rate hit 8.5% in March, the highest since December of 1981, as high energy prices, supply constraints, and robust demand continue to weigh. Other important releases include producer prices, retail sales, industrial production, preliminary reading for the Michigan consumer sentiment, the NFIB business optimism index, monthly budget statement, export and import prices, business inventories, and the NY Empire State Manufacturing Index. Markets will be closed Friday in observance of Good Friday.
Have a great week.
Stephen Colavito, Jr.
Chief Investment Officer
Perigon Wealth Management, LLC
This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. Perigon Wealth Management is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 415-430-4140 or sending an email request to Compliance@PerigonWealth.com