Last Week The Fed stayed on message following their FOMC meeting on Wednesday, dot plot showed that none of the eighteen members of the FOMC saw rate cuts in 2023. In fact, at the Chairman’s press con...
Market Commentary: Week of February 6, 2023
Written by John Tuohy
February 06, 2023
It was another week for the books. On Wednesday, the Federal Reserve concluded its FOMC meeting and released a statement that seemed mildly hawkish, at least compared to where the markets had been going. The statement promised further rate increases but did highlight that the “pace” could slow—a signal that the days of 50 and 75 basis point hikes were over for now. Then came the press conference.
After improving his game over the last seven months (starting at Jackson Hole this summer), clearly and succinctly telling the markets that the Fed was going to do whatever it takes to bring down inflation and that restrictive monetary policy would remain until “the job is done," he botched the message. When asked if he believed that financial conditions have eased since the December FOMC, a question that just about every economist in the nation has said yes to, Powell said, “no, they haven’t."
With that statement, the markets switched on the wishful thinking machine and determined that if Powell believed the current financial conditions remain just as restrictive as they were in December, that must mean that the Fed is done hiking and getting ready to cut in the middle of 2023. Stocks surged and rates plunged off that statement.
Unfortunately, on Friday, the BLS Non-Farm Payroll Report delivered an upside shocker. Wall Street estimates called for a payroll add of about 195,000 and instead got 517,000! Talk about the wrong report at the wrong time.
On Thursday, the 2-year Treasury note printed a yield of 4.03%. By Friday afternoon it yielded 4.29%. Just plain ugly!
- The S&P 500 rose 1.60% for the week. The average daily move was 1.26%.
- The NASDAQ surged 3.31% for the week. The average daily move for the week was a massive 2.09%.
- The 2-year Treasury yield rose 9 basis points, closing at 4.29% on Friday. High year-over-year 4.72%, low yield 1.29%.
- The 10-year Treasury yield increased 2 basis points for the week, closing at 3.53% on Friday. Year-over-year high yield 4.24%, low yield 1.73%.
- The VIX Index declined 0.97% for the week, closing at 18.33 Friday. On Wednesday the index set a new year-over-year low of 17.87. Year-over-year high 36.45 and low 17.87.
- The MOVE Index dropped 1.78%, closing at 98.9 on Friday. Year-over-year high 160.72 and low 81.76.
- 5-year Investment Grade Corporates (as measured by Markit CDX) spreads tightened 2 basis points for the week closing at 69 basis points Friday. High spread year-over-year high of 111 and low of 62.
- High Yield corporate debt (as measured by Markit CDX) decreased by 12 basis points, closing at 419 basis points on Friday. Year-over-year high 627, and low 341.
- US Dollar Index rose 0.97% closing at 102.92 on Friday. Year-over-year high 114.11 and low 95.379.
- WTI Crude declined 7.9% using the March 2023 WTI Futures contract, closing at 73.39 Friday. Year-over-year high 123.70, and low 71.02.
- Gold, as measured by the April futures contract, dropped 3.6% for the week closing at 1,876 on Friday. High price for the front contract year-over-year is 2,043 and the low is 1,623.
- Bitcoin was nearly unchanged for the week closing at 23,383 on Friday. High price year-over-year 47,967 and low 15,632.
The Week Ahead
We come in this morning to see the carnage in rates continuing from Friday’s close. The 2-year Treasury note is up another 13 basis points to yield 4.42%. Longer-dated issues are up about 10 basis points. Stocks are getting hit, but so far it is not a blood bath.
Looking at Fed Fund futures, they currently imply a good chance of two more rate hikes at the March and June meetings and then a pause before cutting rates near year-end. Too optimistic? Probably.
This year has been all about positions and flows and not relative value. Many are calling the January equity rally the mother of all short-covering events. It could have been that for interest rates as well. The question now is, if the shorts have all covered, is there anything to drive markets back up? More importantly, if all the shorts are covered, are there no speed bumps for the markets on the way down? Good times.
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 & Telecommunications. 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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John Tuohy is CEO of SWBC Investment Services, LLC, a Broker/Dealer and SWBC Investment Company, an SEC Registered Investment Advisor (RIA). In his role, John is responsible for identifying, developing, and executing the division's strategic plan and all business development, sales, and marketing activities.
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