Market Commentary: Week of December 05, 2022

Last Week

Last week, both stocks and bonds decided to take the “glass half full” approach. On Wednesday, Fed Chairman Powell delivered a much-anticipated speech at The Brookings Institute. The markets seemed to be desperately searching for any sign that Powell might signal a change of pace or even a change of heart on restrictive monetary policy for 2023, given some signs of a slowing economy and perhaps the arrival of peak inflation. Sometimes we hear what we want to hear. Regardless of Powell’s clear statements that, “despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation,” the markets keyed in on, “The time for moderating the pace of rate increases may come as soon as the December meeting.” Stocks roared and bond yields plunged off that sentence.

Then on Friday, we got what one commentator called, “The wrong report at the wrong time.” The BLS non-farm payroll report for November surprised to the upside with the most shocking number, Average Hourly Earnings coming in at 0.6%, month-over-month. This was DOUBLE the consensus estimate. Stocks fell and yields rose sharply off the report. However, both bonds and stocks recovered by day’s end.

Is this a sign that the bottom has been put in for equities and bond prices or cognitive dissonance?      

• The S&P 500 rose 1.14% for the week. The average daily move was 1%.
• The NASDAQ advanced 2.1% for the week. The average daily move for the week was 1.38%.
• The 2-year Treasury yield dropped 18 basis points, closing at 4.27% on Friday. The high year-over-year was 4.72%, and the low yield was 0.40%.
• The 10-year Treasury yield fell 19 basis points for the week, closing at 3.49% on Friday. The year-over-year high yield was 4.24%, and the low yield at 1.345%.
• The VIX Index dropped 7% for the week, closing at 19.06 Friday. The year-over-year high was at 36.45 and the low was at 16.29.
• The MOVE Index declined 8.47% for the week, closing at 118.62 on Friday. Year-over-year high of 160.72 and a low of 69.1.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads closed nearly unchanged for the week closing at 78 basis points Friday. High spread Year-over-year high of 111 and a low of 49.
• High Yield corporate debt (as measured by Markit CDX) increased by 2 basis points, closing at 463 basis points on Friday. The year-over-year high was 627 and the low was 288.
• US Dollar Index fell 1.33% for the week closing at 104.545 on Friday. Year-over-year high of 114.11 and a low of 94.79.   
• WTI Crude rose 4.9% using the January 2023 WTI Futures contract, closing at 79.98 Friday. Year-over-year high 123.70 and low 68.23.  
• Gold, as measured by the February futures contract, advanced 2.2% for the week closing at 1,809 on Friday. The high price for the front contract year-over-year is 2,043 and the low is 1,623.
• Bitcoin rose 3.14% closing at 17,015 on Friday. High price year-over-year 67,734 and low 15,731

The Week Ahead  

We come in this morning with stocks lower and Treasury yields higher in the front end of the curve as markets digest last Friday’s employment report surprise. So far equities have shown to be quite resilient, rallying off of any hints of weaker data and selling off modestly on stronger-than-expected data. If this tone continues “Animal Spirits” could break out and give us a nice Christmas rally. Personally, I am somewhat doubtful that the rally would last beyond New Year’s Day, but confident it will be in our Christmas stockings.

This week’s economic data starts with Durable Goods today, Unit Labor Costs Wednesday, and PPI on Friday. The Fed is in their quiet period ahead of next week’s FOMC meeting.

Definitions:

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg. The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield.• The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.• The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September.• The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September.• The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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