Last Week In Review
Last week, rising interest rate fears and growth worries pushed the S&P 500 Index to its most significant decline over the holiday-shortened week in more than 14 months. (Markets were closed last Monday in observance of the Martin Luther King, Jr., holiday.) The Nasdaq Composite Index slumped roughly 7.5%, its biggest weekly drop since the start of the pandemic. Weakness in semiconductor shares weighed on technology stocks, while weakness in automakers and home improvement retailers dragged down the consumer discretionary sector. Declines in financial giants JPMorgan Chase and Goldman Sachs took a toll on financial services shares. A more than 20% decline in Netflix shares following its fourth-quarter earnings report contributed to the indexes’ losses last Friday.
Traders I spoke with noted that much of the week’s volatility appeared to be due to technical factors. Heavy flows in and out of index-focused exchange-traded funds (ETFs) indicated that many investors were trading equities as an overall asset class rather than based on the week’s earnings reports or other fundamentals. On Thursday, further, selling appeared to be prompted by the Nasdaq crossing below its 200-day moving average for the first time since April 2020. The declines left the Nasdaq in correction territory, or down more than 10% from its mid-November highs.
Fears that the Federal Reserve will need to act aggressively to curb inflation loomed large over sentiment. Traders reported increasing speculation on Wall Street that the Fed will announce a 50-basis-point (0.50%) increase in the federal funds target rate at its March meeting (note: I beg to differ, but that was the sentiment of the week putting pressure on equities), instead of the incremental 25-basis-point increases that have characterized Fed action in recent years. According to CME Group data, futures markets are currently pricing at the nearly two-thirds chance of official short-term rates increasing by at least 100 basis points in 2022.
US – Markets & Economy
Growth forecasts weakened even as interest rate expectations increased. The trading week began on Tuesday with a report showing a surprise drop-in factory activity in the New York region, the first since early 2020; a related gauge of activity in the mid-Atlantic region. The latest housing market data were mixed. In December, housing starts, and permits surprised to the upside while existing home sales slumped over the month. An unexpected jump in weekly jobless claims seemed to have the most significant impact on markets. Jobless claims rose to 286,000, the most since mid-October.
Many observers attributed the increase in claims to the spread of the omicron variant of the coronavirus. The week brought encouraging news of a nationwide decline in cases, particularly in New York and other large cities. However, President Biden’s less than a stellar press conference, mixed messages from the White House thereafter, and continued Ukraine-related tensions between the U.S. and Russia also weighed on sentiment.
US – Equity Market Performance
|Index||Friday’s Close Week Ending 1/21/2022||Weekly (+/-) Point Change 1/21/2022||% Change YTD Week Ending 1/21/2022|
|S&P Midcap 400||2,594.48||-188.15||-8.71%|
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 jobs data appeared to result in the flattening of the Treasury yield curve—or the relationship between short- and long-term yields. The yield on the benchmark 10-year U.S. Treasury note hit 1.90% on Wednesday—its highest level since late 2019—but fell back sharply in the wake of Thursday morning’s weaker-than-expected jobless claims report.
The broad tax-exempt bond market produced losses through most of the week. It underperformed Treasuries amid outflows from municipal bond mutual funds industrywide, which marked the first week of negative net flows for the asset class since March 2021. Municipal traders, I spoke with observed weakness in the primary market, with several new offerings repricing to higher yields. A U.S. District Court approved the debt restructuring plan put forward by Puerto Rico’s Financial Oversight and Management Board, which will allow the territory to exit a process like bankruptcy that began in 2017.
Traders noted that investment-grade corporate bond spreads widened initially in response to mixed macroeconomic sentiment, earnings reports, and an active primary calendar. However, a move in rates contributed to heightened overnight demand, which supported the asset class from a technical perspective. Several U.S. banks came to market with new issuance, generally well subscribed.
High yield bonds traded lower amid broad risk-off sentiment due to equity weakness and the sell-off in the Treasury market (note: high yield bonds have a high correlation to equities). Traders noted, however, that the below-investment-grade space remained orderly, with buyers showing a healthy interest in new deals and preferring higher-quality and short-dated paper.
US Treasury Markets – Current Rate and Weekly Change
3 Mth: +0.05 bps to 0.16%
2-yr: +0.03 bps to 1.00%
5-yr: 0.00 bps to 1.56%
10-yr: -0.02 bps to 1.76%
30-yr: -0.05 bps to 2.07%
SOURCE: FOR THE WEEK ENDING January 21, 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 CANNOT GUARANTEE FUTURE RESULTS.
Interesting News Overseas
Shares in Europe ended lower, as expectations grew that the European Central Bank (ECB) would raise interest rates this year and that the Bank of England (BoE) would also need to tighten its monetary policy. The pan-European STOXX Europe 600 Index fell 1.40% in local currency terms. Among the major indexes, Germany’s Xetra DAX Index slid 1.76%, Italy’s FTSE MIB Index lost 1.75%, and France’s CAC 40 Index weakened by 1.04%. The UK’s FTSE 100 Index slipped 0.65%.
Core eurozone bond yields fell as ECB President Christine Lagarde squashed expectations for an interest rate increase this year and geopolitical tensions over Ukraine intensified. Peripheral eurozone bond yields broadly tracked core markets but ended almost flat. UK gilt yields ended slightly higher, as inflation at a 30-year high led to markets pricing in the higher likelihood of a BoE rate hike in February.
ECB President Christine Lagarde rejected calls for the central bank to raise interest rates more quickly than planned to curb record inflation. On France Inter radio, she said that the U.S.’s economic recovery cycle is ahead of Europe. Earlier, data showed that surging energy and food costs drove eurozone inflation to a record 5% in December—well above the ECB’s 2% target. Lagarde reiterated that inflation would stabilize and “gradually fall” (she didn’t say the “T” word) back below target by the end of the year.
Deep divisions in the ECB’s rate-setting Governing Council emerged at the December meeting, minutes showed. The majority agreed that “substantial monetary support was still needed” for inflation to stabilize at the central bank’s targeted level in the next three years. However, some members warned that inflation might stay higher for longer and said that they could not support the “overall package” of adjustments to the bank’s asset purchase programs.
On the other side of the planet, Chinese markets posted a weekly gain as the government stepped up monetary easing measures and signaled additional support for the beleaguered property sector. The Shanghai Composite Index edged up 0.1%, and the CSI 300 Index added 1.1%.
Last Monday, the People’s Bank of China (PBOC) unexpectedly reduced the interest rate on one-year medium-term lending facility (MLF) loans to some financial institutions by ten basis points to 2.85%, the central bank’s first reduction since April 2020. In response, Chinese banks cut their loan prime rates for one- and five-year loans. China’s central bank sets the MLF rate, upon which domestic lenders set their loan prime rates or the de facto benchmark for new loans. PBOC Vice Governor Liu Guoqiang said that China would roll out additional policy measures to stabilize the economy and preempt downward pressures following the rate cut. His comments triggered a rally in Chinese government bonds, sending the yield on the 10-year sovereign bond down to 2.736% from last week’s 2.809%.
This Week Ahead
The Federal Reserve will likely leave the fed funds rate steady when it meets this week. Still, investors expect the central bank to confirm further an initial interest rate increase in March with a balance sheet reduction later in the year. Traders will also look for updates on the Fed’s view regarding the risks from the spread of the omicron variant and high inflation. On the data front, the advance estimate for the US GDP growth is expected to show a 5.6% expansion in Q4, much higher than 2.3% in Q3. Other important releases include flash Markit PMIs, personal income, spending, and PCE prices, house prices from both FHFA and S&P/Case-Shiller, and new and pending home sales.
Meanwhile, the earnings season continues with big tech names, including Apple and Microsoft, due to report next week. 3M, American Express, GE, Intel, Boeing, AT&T, Tesla, Visa, Chevron, Caterpillar, and McDonald’s will also publish quarterly results.
Have a great week.
Stephen Colavito, Jr.
Chief Investment Officer
Perigon Wealth Management, LLC
E: [email protected]
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 [email protected]